COST AUDIT CONCEPT
LE!L P"O#I$ION$ P"O#I$ION$
12O C!N 3E CO$T !45ITO"
!PPOINT:ENT O+ CO$T !45ITO"
>4!LI+IC!TION, 5I$>4!LI+IC!TION, "I2T$, 54TIE$ !N5 O3LI!TION$ O+ CO$T !45ITO"
$43:I$$ION O+ CO$T !45IT "EPO"T
It is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company. Cost !udit !udit is covered covered by $ection $ection %&' of of the Companies Companies !ct, !ct, ()%*. ()%*. The audit audit conducted conducted under this section shall be in addition to the audit conducted under section %&*. !s per the section %&' the Central overnment may by order specify audit of items of cost in respect of certain companies. +urther, the Central overnment may, by order, order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the boos of account ept by that class of companiesProvided that the Central overnment shall, before issuing such order in respect of any class of companies regulated under a special !ct, consult the regulatory body constituted or established under such special !ct. If the Central overnment is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies, hich are covered under sub section /%0 and hich have a net orth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order. The audit shall be conducted by a Cost !ccountant in Practice ho shall be appointed by the 3oard of such remuneration as may be determined by the members in such manner as may be prescribedProvided that no person appointed under section %*6 as an auditor of the company shall be appointed for conducting the audit of cost records- /$tatutory !uditor 7 Cost !uditor cannot be same person0 Provided further that the auditor conducting the cost audit shall comply ith the cost auditing standards /8cost auditing standards8 mean such standards as are issued by the Institute of Cost and 1ors 1ors !ccountants of India, constituted under the Cost and 1ors 1ors !ccountants !ct, %696, ith the approval of the Central overnment0. !s per rule %& of the Companies /!udit and !uditors0 "ules, ()%& /a0 in the case of companies hich are re;uired to constitute an audit committee< /i0 the 3oard shall appoint an individual, ho is a cost accountant in practice, or a firm of cost accountants in practice, as cost auditor on the recommendations of the !udit committee, hich shall also recommend remuneration for such cost auditor= /ii0 the remuneration recommended by the !udit Committee under /i0 shall be considered and approved by the 3oard of 5irectors and ratified subse;uently by the shareholders= /b0 in the case of other companies hich are not re;uired to constitute an audit committee, the 3oard shall appoint an individual ho is a cost accountant in practice or a firm of cos t accountants in practice as cost auditor and the remuneration of such cost auditor shall be ratified by shareholders subse;uently. The ;ualifications, dis;ualifications, rights, duties and obligations applicable to auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the companyProvided that the report on the audit of cost records shall be submitted by the cost accountant in practice to the 3oard of 5irectors of the company. ! company company shall ithin *) days from the date of receipt of a copy of the cost audit report prepared /in pursuance of a direction issued by Central overnment0 furnish furnish the Central overnment ith such report along ith full information and e?planation on every reservation or ;ualification contained therein. If, after considering the cost audit report referred to under this section and the, information and e?planation furnished by t he company as above, the Central overnment is of the opinion, that an y further information or e?planation is necessary, it may call for such further information and e?planation and the company shall furnish the same ithin such time as may be s pecified by that overnment.
Cost Audit will be advantageous to the stockholders in the following manner: (1) To Management (i) Reliability of data for price fixing, control and decision making (ii) !aste control and conse"uently cost reduction (iii) #hrough the system of budgetary control and standard costing, cost control is established (iv) $roper valuation of closing stock, work in progress (2) To Society (i) Cost Audit is often introduced for the purpose of price fixation Customers are saved from exploitation through proper costing of products and services (ii) %ince price increase by some industries is not allowed without proper &ustification as to increase in cost of production, inflation through price hikes can be controlled and consumers can maintain their standard of living (3) To Shareholders Cost Audit ensures that proper records are kept as to purchases and utili'ation of materials and expenses incurred on wages etc t also makes sure that the valuation of closing stock and workinprogress is on a fair basis #he shareholders are assured about the calculation of the profitability and thus return on their investments (4) To Government (i) n a cost plus contract, price fixation is properly calculated (ii) $rice ceiling for essential commodities and thus undue profiteering is checked (iii) Able to monitor inefficient units (iv) *ecision support on +overnment protection to certain industries (v) %ettlement of trade disputes (vi) Cost audit and conse"uent management action can create a healthy competition among the various units in an ndustry #his imposes an automatic check on inflation
Application Of Cost Records ( First) Companies Engaged In The Production Of Following Goods In Strategic Sectors, Such As: !achiner" And !echanical Appliances #sed In $efence, Space And Atomic Energ" Sectors E%cluding An" Ancillar" Item Or Items& Tur'o (ets And Tur'o Propellers Arms And Ammunitions Propellant Powders) Prepared E%plosi*es, +Other Than Propellant Powders) Safet" Fuses) $etonating Fuses) Percussion Or $etonating Caps) Igniters) Electric $etonators) -adar Apparatus, -adio .a*igational Aid Apparatus And -adio -emote Control Apparatus Tan/s And Other Armoured Fighting 0ehicles, !otorised, 1hether Or .ot Fitted 1ith 1eapons And Parts Of Such 0ehicles, That Are Funded
Above clause shall be applicable only if if the net orth of the co!pany is rupees "ve hundred crore or !ore or the turnover is rupees "ve hundred crore or !ore
(Second) Companies Engaged In An Industr" -egulated 2" A Sectoral -egulator Or A !inistr" Or $epartment Of Central Go*ernment: Port ser*ices Aeronautical ser*ices Telecommunication ser*ices Generation, transmission, distri'ution and suppl" of electricit" -oads and other infrastructure pro3ects $rugs and Pharmaceuticals Fertilisers Sugar and industrial alcohol Petroleum products regulated '" the Petroleum and .atural Gas -egulator" 2oard -u''er and allied products 'eing regulated '" the -u''er 2oard
For the purposes of above clause# the thresholds li!it shall be as under$% (i)
(ii)
in the case of a !ulti%product or a !ulti services co!pany# any product or a service for hich the individual turnover is rupees "fty crore or !ore& in the case of a co!pany# producin' any one speci"c product or service# if the net orth of the co!pany is rupees one hundred and "fty crore or !ore or the turnover is rupees tenty "ve crore or !ore ♦
In the case of companies engaged in an industry regulated by a sectoral regulator, the requirements of sectoral regulator regarding cost records shall be taken into account.
(Second) Companies operating in areas in*ol*ing pu'lic interest such as:
-ailwa" or tramwa" locomoti*es, rolling stoc/, railwa" or tramwa" 4%tures and 4ttings, mechanical tra5c signalling e6uipment7s of all /ind !ineral products including cement Ores !ineral fuels +other than Petroleum, mineral oils etc 2ase metals Inorganic chemicals, organic or inorganic compounds of precious metals, rareearth metals of radioacti*e elements or isotopes, and Organic Chemicals (ute and (ute Products Edi'le Oil under Administrati*e Price !echanism Construction Industr" Companies engaged in health ser*ices *i8& functioning as or running hospitals, diagnostic centres, clinical centres or test la'oratories Companies engaged in education ser*ices, other than such similar ser*ices falling under philanthrop" or as part of social spend which do not form part of an" 'usiness&
For the purposes of a'o*e clause the thresholds limit shall 'e as under:
(i)
(ii)
In the case of a !ulti%product or a !ulti services co!pany any product or a service for hich the individual turnover (fro! such speci"c product or such speci"c service) is rupees "fty crore or !ore& In the case of a co!pany producin' any one speci"c product or service# if the net orth of the co!pany is rupees one hundred and "fty crore or !ore or the turnover is rupees tenty "ve crore or !ore
(Others) Companies +including foreign companies other than those ha*ing onl" liaison o5ces engaged in the production, import and suppl" or trading of following medical de*ices, namel": Cardiac Stents $rug Eluting Stents Catheters Intra Ocular 9enses 2one Cements eart 0al*es Orthopaedic Implants Internal Prosthetic -eplacements Scalp 0ein Set
$eep 2rain Stimulator 0entricular peripheral Shud Spinal Implants Automatic Impalpa'le Cardiac $e;o'illator Pacema/er +temporar" and permanent patent ductus arteriosus, atrial septal defect and *entricular septal defect closure de*ice Cardiac -es"nchroni8e Therap" #rethra Spinicture $e*ices Sling male or female Prostate occlusion de*ice #rethral Stents For the purposes of a'o*e clause the thresholds limit shall 'e as under:
(i)
(ii)
in the case of a co!pany en'a'ed in !ultiple products# any product or device for hich the individual turnover (fro! such speci"c product or device) is rupees ten crore or !ore# or one third of the turnover# hichever is less (ii) in the case of a co!pany en'a'ed in one speci"c product or device# if it has net orth of rupees one hundred and "fty crore or !ore or the turnover is rupees tenty "ve crores or !ore&
Applicability for cost audit E*er" compan" engaged in a strategic industr" and co*ered under + First) shall 'e re6uired to get its cost records audited in accordance with these rules& In the case of a multiproduct or a multi ser*ices compan" speci4ed in (Second) , the re6uirement for cost audit shall appl" to a product or a ser*ice for which the indi*idual turno*er +from such speci4c product or such speci4c ser*ice is rupees one hundred crore or more) In the case of a compan" producing an" one speci4c product or ser*ice speci4ed in (Second), the re6uirement for cost audit shall appl" if the net worth of the compan" is rupees 4*e hundred crore or more or the turno*er from such product or such ser*ice is rupees one hundred crore or more& In the case of a compan" engaged in medical products or de*ices referred to in (Others) which has multiple products or de*ices +i&e& a compan" producing, importing and suppl"ing or trading in more than one medical de*ice or product, the re6uirement for cost audit shall appl" to a medical de*ice or product for which the indi*idual turno*er +from such speci4c medical de*ice or product is rupees ten crore or more, or one third of the turno*er, whiche*er is less which has onl" one product or de*ice +i&e& a compan" producing, importing and suppl"ing or trading one medical de*ice or product, the re6uirement for cost audit shall appl" if the net worth of the compan" is rupees one hundred 4ft" crores or more or the turno*er is rupees twent" 4*e crores or more&
