Introduction to Cost Audit:
Methods and techniques of ‘cost accounting’ and audit of ‘cost accounts’ in India can be traced back
to the year 1925, when large number of fi rms were given contracts by the Government of India on
“cost plus” basis and the Government started verifying and investigating the cost structure of such
fi rms.
Need for large scale industrialization immediately after the independence required lot of
concessions and facilities to the entrepreneurs to establish industrial undertakings for production
of common man’s goods and essential services. Power, electricity and other inputs were provided
at concessional rates. Liberal fi nances were provided by the banks and other fi nancial institutions.
Land was made available with all infrastructures. Transport facilities were also provided. However,
there were only very few industrial groups and it was a suppliers market in almost all the areas.
There were many bureaucratic hurdles in opening of new industries along with need for licenses
and permits. Imports were mostly prohibitive due to scarce foreign exchange and very high rate
of custom duties on imports. Therefore, consumers had very few choices and there were often
complaints of excessive pricing, which encouraged smuggling and other malpractices like underinvoicing
of imports to save custom duties or over-invoicing of exports to get higher export benefi ts.
The high prices were often justifi ed on the basis of higher indigenous cost of production. Thus the
government felt the need for price controls.
Companies Act, 1956 was amended in the year 1965 to incorporate the provisions
relating to the maintenance of Cost Accounting Records and Cost Audit. These amendments were
made on the basis of recommendations from the Vivian Bose Commission, Dutta Commission and
the Shastry Committee.
Cost audit is the audit of cost records. According to Chartered Institute of Management Accountants,
London (CIMA), cost audit is “the verifi cation of the correctness of cost accounts and of the
adherence to the cost accounting plan”. In other words, cost audit is the verifi cation of the cost of
production of any product, service or activity on the basis of accounts maintained by an enterprise
in accordance with the accepted principles of cost accounting. This defi nition of Cost Audit is
relevant to the voluntary Cost Audit without any statutory backing
The Institute of Cost and Works Accountants of India on the other hand, defi nes cost audit as “a
system of audit introduced by the Government of India for the review, examination and appraisal
of the cost accounting records and attendant information, required to be maintained by specifi ed
industries.” Thus the concept and scope of cost audit as defi ned in India is more specifi c and lays
emphasis on the evaluation of the effi ciency of operations and the propriety of management actions
as introduced by the Government of India for specifi ed industries. In this sense, cost audit in India
appears to be synonymous with effi ciency audit mainly as a guide for management policy and
decision making besides being a barometer of actual performance
The justifi cation for mandatory Cost Accounting and Cost Audit provisions has been very well
explained in the Parliamentary Debate that led to the adoption of Companies Amendment Bill,
1965 incorporating the provisions related to Sections 209 (1) (d) and 233B. Smt. Tara Ramchandra
Sathe (MP for Maharashtra) stated during the relevant Rajya Sabha Debate as under:
What is Cost Audit? The Cost Audit is quite different from the Financial Audit. It is to see whether the labour
is effi cient or not, whether the industry has provided effi cient labour or the labour which is required by that
industry is less than what is required, whether every material and every part of the machinery is used to the
optimum, whether any material is wasted, etc.
As we all know, we are short of material, there is so much material which is imported, when we are short of
foreign exchange. In these circumstances, it is very essential that there should be cost audit. In fact, it should
be introduced in almost all the industries, but the Government is trying this in certain cases only. So by this
we will know whether there is a proper utilization of the material or not. It is very essential, no doubt, and in
factories and industries, everywhere, this cost audit should be emphasized.” (Proceedings of Rajya Sabha, 14th September, 1965: Columns 3944 and 3945).
Thus Cost Audit in India refers to the statutory Cost Audit of the selected companies covered
under the relevant provisions of the Companies Act, 1956. These requirements are mandatory and
non-compliance may invite penal provisions also
Methods and techniques of ‘cost accounting’ and audit of ‘cost accounts’ in India can be traced back
to the year 1925, when large number of fi rms were given contracts by the Government of India on
“cost plus” basis and the Government started verifying and investigating the cost structure of such
fi rms.
Need for large scale industrialization immediately after the independence required lot of
concessions and facilities to the entrepreneurs to establish industrial undertakings for production
of common man’s goods and essential services. Power, electricity and other inputs were provided
at concessional rates. Liberal fi nances were provided by the banks and other fi nancial institutions.
Land was made available with all infrastructures. Transport facilities were also provided. However,
there were only very few industrial groups and it was a suppliers market in almost all the areas.
There were many bureaucratic hurdles in opening of new industries along with need for licenses
and permits. Imports were mostly prohibitive due to scarce foreign exchange and very high rate
of custom duties on imports. Therefore, consumers had very few choices and there were often
complaints of excessive pricing, which encouraged smuggling and other malpractices like underinvoicing
of imports to save custom duties or over-invoicing of exports to get higher export benefi ts.
The high prices were often justifi ed on the basis of higher indigenous cost of production. Thus the
government felt the need for price controls.
Companies Act, 1956 was amended in the year 1965 to incorporate the provisions
relating to the maintenance of Cost Accounting Records and Cost Audit. These amendments were
made on the basis of recommendations from the Vivian Bose Commission, Dutta Commission and
the Shastry Committee.
Cost audit is the audit of cost records. According to Chartered Institute of Management Accountants,
London (CIMA), cost audit is “the verifi cation of the correctness of cost accounts and of the
adherence to the cost accounting plan”. In other words, cost audit is the verifi cation of the cost of
production of any product, service or activity on the basis of accounts maintained by an enterprise
in accordance with the accepted principles of cost accounting. This defi nition of Cost Audit is
relevant to the voluntary Cost Audit without any statutory backing
The Institute of Cost and Works Accountants of India on the other hand, defi nes cost audit as “a
system of audit introduced by the Government of India for the review, examination and appraisal
of the cost accounting records and attendant information, required to be maintained by specifi ed
industries.” Thus the concept and scope of cost audit as defi ned in India is more specifi c and lays
emphasis on the evaluation of the effi ciency of operations and the propriety of management actions
as introduced by the Government of India for specifi ed industries. In this sense, cost audit in India
appears to be synonymous with effi ciency audit mainly as a guide for management policy and
decision making besides being a barometer of actual performance
The justifi cation for mandatory Cost Accounting and Cost Audit provisions has been very well
explained in the Parliamentary Debate that led to the adoption of Companies Amendment Bill,
1965 incorporating the provisions related to Sections 209 (1) (d) and 233B. Smt. Tara Ramchandra
Sathe (MP for Maharashtra) stated during the relevant Rajya Sabha Debate as under:
What is Cost Audit? The Cost Audit is quite different from the Financial Audit. It is to see whether the labour
is effi cient or not, whether the industry has provided effi cient labour or the labour which is required by that
industry is less than what is required, whether every material and every part of the machinery is used to the
optimum, whether any material is wasted, etc.
As we all know, we are short of material, there is so much material which is imported, when we are short of
foreign exchange. In these circumstances, it is very essential that there should be cost audit. In fact, it should
be introduced in almost all the industries, but the Government is trying this in certain cases only. So by this
we will know whether there is a proper utilization of the material or not. It is very essential, no doubt, and in
factories and industries, everywhere, this cost audit should be emphasized.” (Proceedings of Rajya Sabha, 14th September, 1965: Columns 3944 and 3945).
Thus Cost Audit in India refers to the statutory Cost Audit of the selected companies covered
under the relevant provisions of the Companies Act, 1956. These requirements are mandatory and
non-compliance may invite penal provisions also
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