Cost Audit Importance

Cost Audit is the process for certifying the cost allocation of products or services comprising of their labour cost, manufacturing cost, overheads, etc. Cost Audit is a reliable verification of the accounts and records so they can be maintained according to the Cost Accounting Standards.

In the words of “R.W. Dobson”, cost audit is defined as, “The verification of the correctness of cost accounts and the adherence to the cost accountancy plan.” 

When is Cost Audit applicable?

Applicability and non-applicability of cost audit:

• Every company specified like drugs and pharmaceuticals, fertilisers, sugar, etc shall get its cost records audited in accordance to the rules mentioned in the Company Act, 2013. The conditions are:
• If the overall annual turnover of the company is rupees fifty crore or more, and 
• If the aggregate turnover of products or services for which cost records are required to be maintained is rupees twenty-five crore or more.
• Every company specified like arms and ammunition, cement, coffee and tea, ores and mineral products, etc shall get its cost records audited in accordance to the rules mentioned in the Company Act, 2013. The conditions are:
• If the overall annual turnover of the company is rupees one hundred crore or more, and
• If the aggregate turnover of products or service for which cost records are required to be maintained is rupees thirty-five crore or more.
• The requirement for cost audit under the rules shall not apply to a company:
• whose revenue from exports, in foreign exchange, exceeds seventy-five per cent of its total revenue; or
• which is operating from a Special Economic Zone; or
• which is engaged in the generation of electricity for captive consumption through Captive Generating Plant.

What is the relevance of Cost Audit?

Relevance of cost audit:

• The company can analyse their cost of production and adopt effective measures to reduce their cost on labour, materials, and overheads. 
• It helps the management to decide accurately on the company’s finances based on the findings of the cost audit reports. 
• It ensures the management that the accounts are prepared according to Cost Accounting Standards.
• It smooths the working of the cost and accounting department of the company and also suggests scope for improvement.
• By the expenditure involved, it gives a clear overview of the minimum cost to be determined. 
• It ensures the accuracy of cost accounts and also detects errors, frauds, malpractice and unethical practices can be easily detected through a cost audit.
• It assists in cost control and cost reduction.
• It helps to promote good relations between the employees and the management.
• It is a great tool to examine profits and efficiency.
• It aids the company to evaluate its resources for better productivity. 
• Lastly, it highlights strong and weak points in the company, thereby suggesting options for corrective action.

The person responsible for cost auditing is known as cost auditor. Functions of a cost auditor include making accurate cost audit reports with genuine facts and data, assisting the government with the report in case of investigation.