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SLIDE 1 : An Empirical Study of Cost Audit in the context of Indian Industries

BY Nitin Kedia ( MBA/2001/10 ) Abhishek Mukherjee ( MBA/2002/10 )

INTRODUCTION According to the Institute of Cost & Management Accountants of England, Cost Audit represents the verification of cost accounts and a check on the adherence to cost accounting plan.

INTRODUCTION It is the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.

INTRODUCTION Cost Audit comprises of : Verification of the cost accounting records like the accuracy of the cost accounts, cost reports, cost statements, cost data and the costing techniques ; Examination of these records to ensure that the adhere to the cost accounting principles, plans, procedures & objectives.




ORIGIN Can be traced back to the World War II Period. India is one of the few countries in the free world where, Cost Audit is statutorily prescribed.

OVERVIEW India was the first country in South Asia (and perhaps in the world) to make cost audit mandatory for some of its business sectors. The Institute of Cost and Works Accountants of India (ICWAI) refers to cost audit as an audit of efficiency of minute details of expenditure while the work is in progress and not a post-mortem examination. Objectives of cost audit include the determination and control of cost together with providing data for making judgements and decisions on various matters, such as operational efficiency. GOI has added industries involved in the manufacturing of plantation products together with the petroleum and telecommunication industries in 2002 to the list of industries requiring mandatory cost audits.

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OBJECTIVES Following 5 Aspects : From the perspective of management From the perspective of shareholders From the perspective of government From the perspective of customers From the perspective of cost accountants

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OBJECTIVES 1. From the perspective of management: Cost audit detects errors, frauds and misappropriation and hence enhances efficiency.


From the perspective of shareholders:

Cost audit ensures that the valuation of closing stock and work-in-progress are correct, hence helps in the computation of more accurate profit figures. 3. From the perspective of the government:

To curb the profiteering by the manufacturing concerns and help in the decision to provide tariff protection to any industry.

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OBJECTIVES 4. From the perspective of customers:

Customers may obtain more benefit if the cost is reduced due to effective control, implemented as a result of a cost audit. 5. From the perspective of cost accountants:

Cost accountants, who are employees of a company, obtain a share of all benefits derived by the company from a cost audit.

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TYPES Basically carried out at the instance of the management for obvious advantages. But sometimes, different circumstances ocassion audit of cost accounts.

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TYPES Some of the different types of Cost Audit are : Cost Audit on behalf of the Management Cost Audit on behalf of a customer Cost Audit on behalf of Government Cost Audit by Trade Associations

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TYPES Cost Audit on behalf of the Management : To check that the cost data placed before the Management are verified & reliable To check that such data are prepared in such detail, to enable the Management in taking appropriate decisions

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TYPES Cost Audit on behalf of a Customer : To satisfy oneself about the correct ascertainment of a cost, especially in Cost Plus contracts

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TYPES Cost Audit on behalf of the Government : When approached with requests for subsidies, protection, etc. May prefer to have the cost of production of the product determined on the basis of Cost Audit to satisfy itself regarding the geniuses of the need & the efficiency of the assistance seeking industry

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TYPES Cost Audit by Trade Association : Where Trade Associations activities include maintenance of the price of products manufactured by member units Also for pooling and contribution arrangements Might seek full information on the costing system, level of efficiency, capacity utilization, etc.

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ADVANTAGES To the Management To society To shareholders To the Government

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ADVANTAGES To the Management : Provides reliable data for day to day operations like price fixation, control, decision making, etc. Minimization of wastages Inefficiencies in the working brought to light to facilitate appropriate corrective action

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ADVANTAGES To the Management : Greatly facilitates the system of budgetary control Establishes reliable check on the valuation of closing stock & work in progress. Detection of fraud & errors

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ADVANTAGES To the Society : In the fixation of prices. The prices so fixed are based upon the correct costing data, thereby saving the consumers from exploitation. Inflation through price hikes can be controlled, allowing the customers to maintain their standard of living.

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ADVANTAGES To the Shareholders : Ensures proper records are kept regarding the purchases & utilisation of materials and the expenses incurred on wages, etc. Ensures the valuation of closing stocks & work in progress is on a fair basis Hence, the shareholders are assured of a fair return on their investments.

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ADVANTAGES To the Government : Ceiling price fixation of essential commodities, thereby preventing undue profiteering Govt. can focus its attention on the insufficient units Govt. can decide in favour of giving protection to certain industries