What is Cost Audit
Cost audit may be described as “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting methods and the continued relevance of such procedures.
Cost Audit is a mechanism with which a firm may determine whether the costs required to carry out that activity is justified.
It also helps to identify cost centres and is also beneficial in planning future strategies. Also, an excellent technique to discover fraud, if any. This is generally done by internal auditors of a suitable sized firm for onward reporting to the top management.
Objectives and Function of Cost Audit
The main object of cost audits is to make available accurate and prompt information to management to assist it in making critical managerial decisions.
The function of cost audit is to ensure the management of the accuracy of cost accounts. In these types of audits, a cost auditor suggests ways to reduce the cost of production and improve the cost accounting plan.
There are five types of Cost Audits. A brief explanation of each of these five types is given below:
Cost Audit on behalf of the Government
Such audits are initiated on order from the government agencies if they think the entity needs a cost audit is necessary. The Government may appoint a cost auditor to conduct cost audit where it is necessary-
- To ascertain correct cost specific units when Government is approached for protection or financial help;
- To determine the accurate cost of the contract given to a private firm under a cost-plus basis;
- To fix reasonable prices of certain items of production to prevent undue profiteering.
Cost Audit on behalf of a Customer
Sometimes, the audit may be conducted on behalf of a customer when he agrees to pay the price for a particular product on “ cost-plus”.
In such a case, the customer gets cost accounts of the product concerned audited to establish correct cost so that he may be able to pay the price based on correct cost plus an agreed margin of profit.
On behalf of Trade Associations
Sometimes, a trade association may appoint a cost auditor to conduct a cost audit-
- To ascertain comparatively profitable of its members;
- To determine the minimum price to avoid cut-throat competition among its members;
- To maintain prices at a certain level to prevent undue profiteering
On behalf of Tribunals
Occasionally, labour tribunals may order an audit of cost accounts to resolve a trade for increased pay, bonuses, and profit-sharing, among other things. Similarly, Income-Tax Tribunals may order an audit of cost accounts to ensure that assessments are made appropriately.
Cost Audit under Statute
These are also called a compulsory audit, and specified companies must undergo a cost audit process. Under Section 233-B of the Companies Act, 1956, the Central Government may mandate that certain companies that are obliged to keep appropriate records of materials utilised, labour, and other expenditures under section 209 have their costs audited. The aim of such types of audit is that the Government wants to ascertain the relationship between cost and prices.