A cost Audit is an important part of a company’s financial and risk management. The main purpose of this cost audit is to help the company to save money by fixing any cost-related mistakes.
Cost auditing is a critical evaluation process used to ensure that cost accounts are accurate and that cost accounting plans and principles have been effectively implemented.
A cost audit is usually conducted to check the quality of the information and ensure that it is accurately recorded. The results obtained through this type of process are used to make several key decisions such as identifying problems and finding out where a cost is coming from and what needs to be done about it.
Advantages of Cost Audit
The following are the main advantages of cost audit to management, cost accountant, shareholders, taxpayers, government and consumers:
Cost audits ensure the accuracy of cost accounting and aid in avoiding mistakes and fraud. Additionally, it will aid in improving cost accounting procedures and strategies to provide management with timely and accurate information. It instils a sense of cost, enhances cost accounting systems, and contributes to increased internal control.
It will help management in taking important decisions because prompt, accurate and reliable information is made available to management with the help of cost audit.
It will help reduce production costs because a close check will be promptly reported to management so that there may not be a recurrence of those wastages. It will bring more reliability to the costing data and hence can be more effectively used for inter-firm comparison.
One of the advantages of cost audit is that it makes Management by exception possible since it separates efficient from inefficient operations and fixes individual responsibility for inefficient operations.
Analysis of variances is facilitated with cost audit because a comparison of actual with standard production and sales is made. Hence. The systems of standard costing and budgetary control will be gainfully applied with cost audits. It improves cost control and presentation effectiveness by introducing efficient routines, reducing expenditure and ensuring promptness.
Cost audit benefits the financial auditor since it enables him to reliably depend on various critical costing data, such as the cost of closing stock or raw materials, work-in-progress completed goods, and so forth. In financial accounting, the closing stock is valued at the lower of cost or market price. Costing books can be relied upon to determine the real cost of closing stock.
In other matters, like payment of commissions on gross profit, production bonus to staff etc., the data supplied by cost accounts audited by the cost auditor can be taken as correct by the financial auditor. Thus, the task of a financial auditor is greatly facilitated if cost accounts are audited.
Cost audit enables the Government to decide whether protection should be given in favour of certain industries or not. Consumers are saved from unreasonable price increase because price increase by the industry ( subject to price control by the Government ) is not allowed without proper justification as to an increase in the cost of production. Thus, consumers are saved from exploitation.
A cost audit will help implement budgetary control and standard costing because a cost audit lays emphasis on the verification of cost accounts and checks on adherence to the cost accounting plans.
A cost audit is very helpful in public undertakings because it pinpoints the inefficiency of the employees. Thus, it will help reduce the cost or production of goods such organisations produce. Making goods available to the masses at a cheaper rate is the prime need of the day, and cost audits will help in this direction.
It is helpful in ascertaining cost claims submitted to the Government under the cost-plus contract. Government departments like Railway, Defense Supplies, Directorate General Supplies and Disposals etc. are using cost audit reports to determine cost claims. A cost audit creates confidence that the costs stated by the contractor are legitimate and accurate.
Cost audit helps the management in inter-unit comparison, which helps improve the performance of inefficient units. It will promote a better understanding between those at the helm of affairs and the person at the bottom. The cost data audited by the cost auditor will prove useful for settling trade disputes for wages, bonuses, share in profit etc.
The Government and the trade associations may require cost audits to fix selling prices to prevent excessive profit-making. The Government also requires cost audits to protect certain industries in the public interest. It contributes to the betterment of the economy by increasing productivity and performance.
Cost Audit Reports release the status of the Cost Accountant. Being external, helps improve costing methods and can solve specific problems, ultimately raising the status of the costing department. It provides information relating to the weak, inefficient or mismanaged unit for taking proper corrective action. It also helps to identify the symptoms of sickness in the unit.
It reveals whether funds invested by shareholders are being profitably used in the business. Thus, shareholders are assured of a fair return on their investment. If collaboration is to be sought with an enterprise, a cost audit report on the enterprise’s working gives valuable information for deciding on such collaboration.