COST AUDIT STRATEGIES

A BUSINESS COSTING APPROACH

For Textiles Sector

CMA A.N.Raman
 Cost Audit : Strategic and Social Costing CMA skill set

Are the annualised long run cost as

per standards?

•Cost Accounting Standards

Social Cost •Cost Auditing Standards
Attest •Standard Auditing practices
•Industry specific knowledge
COST DATA

•Competition Analysis
•Products/Market segments
•Cost Strategies
Business •System support for DSS.
costing •Cost Attestation also
review
Hence there is a need to
contextualise the Review of adeuacy of Cost
approach to cost audit Management Competency?
to industry . No one size
fits all. Textiles fit
here
Common Refrain that can emanate
We know our business better than a Cost accountant
reviewing our operations from outside .
The top management team does not have time or
willingness to cooperate with an external auditor to
comment on his operations .
We have got our own management systems set by the
parent company and you can do nothing about it.
Why not you simply comment on areas you want and
walk away with the fees we have fixed.
 Strategic Partnering Mode

CMA Models

Business
Model
 Broad value Chain of Textiles driving Cost Structures
Cotton Growing or Fibre extraction

Cotton Ginning or Fibre Preparing

Spinning and Fibre Dyeing /knitting

Weaving or Knit Fabric

Greig Cloth Processing

Cloth Finishing including printing and dyeing

Garmenting

Retailing, Branding and Designing

The CMA should be well versed in Value chain cost analysis as a part of the
new domain called as Strategic Cost Management architecture.
 Cost Management: Strategic and Operational View

What activities should we perform?


Product design

Product-line and customer mix
Strategic 
Supplier relationships
View  Customer relationships
Business View
of - Pricing
- Order size
Costing - Delivery
- Packaging

Operational 
Market segmentation

 Resources
View 
Distribution channel
 Activities
 Business processes What drives activity cost?
 Cost drivers 
Activity management
 Product costs
 Customer costs

Business process reengineering

Total quality
 Performance measurement
©1996 Robert S. Kaplan
Management Concepts Impacting BC in textile sector

1. Engagement with Audit Committee on BC Scope

2. Strategic Versus Operational approach to
management.
3. Lead Indicator Versus Lag Indicators
4. Manufacturing Process Versus Business Process
5. Business Model Understanding.
6. Strategies of Operational Excellence (HIGGS
certification)
7. Evolution of non financial audit areas such as Quality
Audits, Sustainability Audits, GMP audits, etc.
8. Throughput Management or Theory of Constraints.
Engagement with Audit Committee

1. Why this is a must ? Company or the Board as the key

stakeholder of BC . It cannot be a unilateral selection of
reporting areas by the cost auditor .
2. Periodicity of reporting need to be decided .
3. Will give the mandate to the auditor to tackle difficult
behavioral issues.
4. Will set reasonable expectations.
5. Not expected to cover all the listed areas as there should be
a cost benefit approach.
6. A grip on what outcomes are desired.
7. Certification of cost statements
O u t c o m eP br oa cs e ds s B a s e d
Audit Approach

New Process for

Product identifying
Developme material
nt Process waste

Cycle Time Input output

taken in parameters
developing of key
prototype resources .
Strategic Operational
Manufacturing Process Versus Business
Process

1. Conventional costing always talks of manufacturing process

and factory oriented cost centres or departments.
2. Organisations today use the business process language.
3. What is a business process ?
4. Why it is important in New CMA tools like ABC ?

Now let us take up a case study of a

textile company with sub verticals