Summary: Cost audit reports, particularly the “Observations and Suggestions” section, provide valuable insights for industries looking to enhance efficiency and profitability. These reports contain specific analyses on capacity utilization, input/output ratios, utility costs, profitability, and various financial ratios. For instance, by examining capacity utilization across production lines, management can identify bottlenecks and implement solutions, such as adjusting machine capacity or improving order flow, to enhance production efficiency. Input/output ratio analysis helps track raw material consumption, revealing which materials yield the best results and highlighting areas for cost savings. Utility cost analysis compares usage over time and can pinpoint inefficiencies in utility consumption, such as power or gas, allowing companies to decide on alternate energy sources or adjust their usage patterns. Additionally, profitability analysis breaks down costs and margins across products and services, guiding decisions on whether to retain or adjust pricing for low-margin items. Ratio analysis offers insights into stock and working capital management, while value addition analysis aids in evaluating the effectiveness of various processes in generating revenue. Altogether, cost audit reports act as a strategic tool for industries to reduce costs, manage resources effectively, and maximize profit potential.
Introduction: Cost Audit Report (CRA 3) contains one para titled as “Observations and Suggestions of Cost Auditor”. Annexure to the Cost Audit Report contains various paras. Observations & Suggestions and the useful information contained in Annexure can help the Industry in Optimum Resources Utilization, Cost Reduction and Profit maximization. Management has to catch the observations and trends shown in the paras, analyze further and take suitable actions in time to get results. In this article, information contained in the paras and how further analysis can be done has been discussed.
1. Capacity Utilization
Quantitative Information Para in Annexure to the Cost Audit Report gives information of Production, Sales, Change in Stock and Capacity Utilization. From this report, one can see easily where capacity utilization has gone down as compared to last year. If data is tabulated for previous five years, trend of capacity utilization can be seen. Management can further analyze capacity utilization in detail by seeing the capacity utilization of each machine/Line. This analysis can be very useful in identifying the reasons of low capacity utilization and suitable remedial steps can be taken. Machine wise capacity utilization can help in identifying bottlenecks in production.
Example of Bottlenecks in Production
If machine in Line A has capacity utilization of 95% and it’s material goes to Line B for further processing which has lower installed capacity, then material at Line B will get accumulated and Production at Line A has to be stopped. Here solution lies in enhancement of capacity utilization of Line B.
Other reasons of low capacity utilization can be Lack of orders, fault in machine etc.
2. Input / Output Ratio
Details of Material Consumed Para in Annexure to the Cost Audit Report gives consumption of top ten items of Raw Material Consumption. From this report Management can prepare following analytical report.
| Input / Output Ratio Analysis | |||
| Name of Product Manufactured | |||
| Current Year | Previous Year | ||
| Name of R.M. | Category | Consumption per | Consumption per |
| Unit of Production | Unit of Production | ||
Category: In above table it means Indigenous, Imported or Own Manufactured.
Benefits of above Analytical Repot
- Report gives comparison of Input/Output ratios of Current Year with Previous Year. Comparison can also be made with Standards, if any, set by the management. Report prepared on monthly basis can be be very useful.
- Report gives comparison of Indigenous Vs. Imported materials, which one is giving better yield and which material is cost effective.
- Report helps in ratio comparison of Own Manufactured Raw Materials Vs. Bought Out Materials.
3. Utilities Cost Analysis
Details of Utilities Consumed Para gives information of Utilities Consumed. Company uses various types of utilities like Power, Steam and Gas etc. Analytical Report of Consumption of Utilities per Unit of Production can be prepared on the same lines as explained in Point No.2 above.
Benefits of above Analytical Report
- Analytical report prepared as suggested above will give comparison of consumption of Utilities on periodic basis. Technical department of company is also having standard norms. Comparison can throw light on the areas which need attention.
- In case of Own produced Utilities like Steam, Power etc. Own manufactured cost can be compared with Purchase cost. Reasons for higher cost can be analyzed. Sometimes it may be due to boiler efficiency or quality of coal.
- Report can be useful in deciding the use of alternate inputs e.g. Company can use alternatively Coal, Furnace Oil, LSHS or Bagasse etc. for Steam generation.
4. Profitability Analysis
Product and Service Profitability Para gives for each item Sales, Cost of Sales and Margin. This report can be further analyzed in the following manner.
| Product\Service Profitability | ||||||||
| Current Year | Previous Year | C.Y. | P.Y. | |||||
| Name | S.P. | Cost Per Unit | Margin | S.P. | Cost Per Unit | Margin | Margin % | Margin % |
This Analytical Report shows which products are in Negative/Low Margin area. These products need attention. This report helps the management in increasing the overall profitability.
Besides above, following analytical reports can be prepared on the basis of Cost sheets prepared for cost audit.
- Unit wise Profitability
- Customer Wise Profitability (For top ten customers)
- Region wise Profitability
- Domestic Vs. Export Profitability
It is relevant to mention here that CRA 1 asks to maintain separate cost statements for exported products. Exports require different packing and other export related expenses. Companies also get export incentives.
These reports are very useful and management can use these for taking important decisions.
5. Ratio Analysis
Financial Position and Ratio Analysis Para gives ratios under three heads Profitability Ratios, Other Financial Ratios and Working Capital Ratios. These ratios in addition to tracking profitability also track Raw Material and Stores & Spares Stock. Both these stock ratios show how many months’ stock company is holding. These help the company in monitoring its stocks thus help in working capital management. It may be the case that company may be holding obsolete spares in stock.
6. Value Addition Analysis
Value Addition and Distribution of Earnings Para shows how much Value Addition has been done by the company and how company has distributed earnings among various stakeholders like Employees, Shareholders, and Government etc. From this Para, reasons for increase/decrease in value addition can be tracked easily. Identification of processes which do not add value as expected ultimately helps in cost reduction.
Above article shows how Cost Records and Cost Audit Report can help in identifying areas of wastage, inefficiencies and Cost Reduction. Ultimate Result should be efficient utilization of resources and improvement in profitability.
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