Cost Audit and Efficiency Audit:
Efficiency Audit is systematic appraisal of management methods and is intended to assess the actual
performance levels relative to applicable peer benchmarks or internal standards (e.g., profi tability or
stated business plan objectives etc.). The process is also designed to identify opportunities to ensure
performance benefits. It aims at identifying efficiency and productivity improvement opportunities
so that the resources fl ow into the most remunerative channels to ensure the optimum returns.
The parameters of measuring effi ciency include overall rate of return, capacity utilization, utilization
of national, financial, physical and human resources, cash fl ow performance and the pay back
period of the entire organization. Thus efficiency audit seeks to evaluate the overall organizational
efficiency.
The cost audit report also mainly the comment on the efficiency of the company namely, utilization
aspect of the factors of production. To enable the cost auditor to make efficiency audit, Section 209
(1) (d) of the Companies Act provides for “records of utilization of material, labour and other items
of cost.” Since a proper appraisal of the extent of efficiency of utilization of factors of production is
possible in cost audit, it may appropriately be called efficiency audit.
The cost audit as efficiency audit can also be understood from the fact that cost audit reports enable
the determination of accurate costs of production of various products, services and activities with
a view to compare the same with the comparable figures of the earlier years and those of the peers
or benchmarks in the industry. It seeks to identify the areas of inefficiency or poor decision making
to ensure diversion of funds to most optimum channels. The information regarding exact unit
costs after proper allocation of overheads, capacity utilization, per unit consumption of major
raw materials (including power and fuel), man-hour productivity, idle hours or un-productive
manpower wastage etc. serve as basis for efficiency audit and helps in fixing appropriate prices of
goods and services produced by the company to ensure optimum returns. The detailed financial
analysis of the company in cost audit report like determination and comparison of different ratios
like ‘profi t as % of capital employed’, ‘profit as % of net sales’, ‘value addition’, ‘current asset as
% of current liabilities’, ‘profit as % of capital employed’ etc. help in assessing the operational
efficiency and comparing the financial health of the undertaking with the peers or others in the
industry aiming at bringing all round efficiency.
Efficiency Audit is systematic appraisal of management methods and is intended to assess the actual
performance levels relative to applicable peer benchmarks or internal standards (e.g., profi tability or
stated business plan objectives etc.). The process is also designed to identify opportunities to ensure
performance benefits. It aims at identifying efficiency and productivity improvement opportunities
so that the resources fl ow into the most remunerative channels to ensure the optimum returns.
The parameters of measuring effi ciency include overall rate of return, capacity utilization, utilization
of national, financial, physical and human resources, cash fl ow performance and the pay back
period of the entire organization. Thus efficiency audit seeks to evaluate the overall organizational
efficiency.
The cost audit report also mainly the comment on the efficiency of the company namely, utilization
aspect of the factors of production. To enable the cost auditor to make efficiency audit, Section 209
(1) (d) of the Companies Act provides for “records of utilization of material, labour and other items
of cost.” Since a proper appraisal of the extent of efficiency of utilization of factors of production is
possible in cost audit, it may appropriately be called efficiency audit.
The cost audit as efficiency audit can also be understood from the fact that cost audit reports enable
the determination of accurate costs of production of various products, services and activities with
a view to compare the same with the comparable figures of the earlier years and those of the peers
or benchmarks in the industry. It seeks to identify the areas of inefficiency or poor decision making
to ensure diversion of funds to most optimum channels. The information regarding exact unit
costs after proper allocation of overheads, capacity utilization, per unit consumption of major
raw materials (including power and fuel), man-hour productivity, idle hours or un-productive
manpower wastage etc. serve as basis for efficiency audit and helps in fixing appropriate prices of
goods and services produced by the company to ensure optimum returns. The detailed financial
analysis of the company in cost audit report like determination and comparison of different ratios
like ‘profi t as % of capital employed’, ‘profit as % of net sales’, ‘value addition’, ‘current asset as
% of current liabilities’, ‘profit as % of capital employed’ etc. help in assessing the operational
efficiency and comparing the financial health of the undertaking with the peers or others in the
industry aiming at bringing all round efficiency.
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