RELEVANCE OF COST AUDIT

RELEVANCE OF COST AUDIT

In the initial years, Cost Audit was taken merely as a tool for ‘price control mechanism’ for consumer
and infrastructure industries in India. The main objective of Cost Audit when statutorily introduced under
the provisions of Companies Act, 1956 was to meet the Government requirements for regulating the
price mechanism in core industries like Cement, Sugar, Textiles and consumer industries like Vanaspati,
Formulations and Automobiles. The objective was to provide an authentic data to the Government to
regulate the demand and supply in the country through a price control mechanism.
The liberalization of the economy and consequential globalization has further enhanced the need for
authentic data.
The Expert committee formed by the Government of India to study the Cost Audit scenario in the country,
highlighted the following benefits of cost information:
v Cost Information enables the organization to structure the cost, understand it and use it for
communicating with the stakeholders.
Costing is an important tool in assessing organizational performance in terms of shareholder and
stakeholder value. It informs how profits and value are created, and how efficiently and effectively
operational processes transform input into output. It contributes to the data input on economy
level parameters like resources efficiency, waste management, resources allocation policies etc.
v Costing includes product, process, and resource-related information covering the functions of the
organization and its value chain. Costing information can be used to appraise actual performance
in the context of implemented strategies.
v Good practice in costing should support a range of both regular and non-routine decisions when
designing products and services to
• meet customer expectations and profitability targets;
• assist in continuous improvements in resources utilisation; and
• guide product mix and investment decisions.
v Working from a common data source (or a single set of sources) also helps to ensure that output
reports for different audiences are reconcilable with each other.
v Integrating databases and information systems can help to provide useful costing information more
efficiently as well as reducing source data manipulation.
As per International Federation of Accountants (IFAC), the general principles of costing and the design
of costing systems in this Guidance are generally applicable to all types of organization. For example,
cost information is an equally important driver of performance information and reporting in public and
not-for-profit organizations. However, some jurisdictions apply legislative expectations on performance.
These legislative mandates require reporting entities to develop and report cost information on a
consistent and regular basis. Rules in some jurisdictions prescribe the calculation of unit costs to (a)
allow comparisons between public authorities, and (b) establish the performance of specific activities.
Cost audits help to ascertain whether an organization’s cost accounting records are so maintained
as to give a true and fair view of the cost of production, processing, manufacturing, and mining of a
product. Therefore, cost audits can be used to the benefit of management, consumers and shareholders
by (a) helping to identify weaknesses in cost accounting systems, and (b) to help drive down costs by
detecting wastage and inefficiencies. Cost audits are also of assistance to governments in helping to
formulate tariff and taxation policies.
The Expert Group noted that the Indian economy has to migrate from the current status to the top end
position of the global competitiveness index in a short/medium time span. In a paper published by Mr.
P.L. Joshi (University of Bahrain in 2001) based on a survey of firms in India on adoption of management
accounting techniques it has been stated that, “Indian managements are generally conservative in
adopting to new techniques of management accounting.” Considering the maturity levels of cost and
management accounting in Indian economy caused by the legacy of protected environment, we have
a long way to traverse without the luxury of time. We do not have the luxury of a long experience curve
for this to happen and need to work out the strategies including policy intervention which will position
cost and management accounting as a soft infrastructure towards building national competitiveness.
We can look at the following maturity levels for devising a strategy:
Base Level : Plethora of legacy practices of cost accounting/ management
Level II : A National standard level of cost accounting discipline
Level III : A self driven level of world class cost/management accounting
The Expert Group was of the view that migrating through above levels should be at great speed and
especially Level II will require statutory drive through standard cost accounting practices for the entire
corporate sector. Once an enterprise crosses Level II into Level III it will be in a mode of voluntary adoption
of all cost and management accounting guidelines to be issued by professional bodies either for internal
financial management or for external reporting.