First-Time Cost Audit? Here’s Your Comprehensive Guide

CMA DILIP BATHIJA 16 Dec 2023 1,056 Views 0 comment Print Company Law | Articles

If management of the company comes to know that Cost Audit has become applicable to the company, Compliance team comes into action. As company is going for cost audit for the first time, many things are new for the compliance team. Procedure of appointment of cost auditor, Preparation of cost records, Getting cost audit done and filing of cost audit report are different as compared to other audits. Many times there is confusion regarding format of Cost Sheet. In this article, important points which will help the compliance team in handling the cost audit smoothly have been discussed.

Procedure of Appointment of Cost Auditor

Company has to appoint cost auditor within one hundred and eighty days of the beginning of financial year. Management starts search for Cost Auditor through various sources. Generally following steps are involved in the appointment of Cost Auditor.
Company has to get a consent letter from the proposed cost auditor.
Appointment of Cost Auditor is made in the meeting of Board of Directors. Remuneration is also decided in the Board meeting.
Company has to file Form CRA-2 along with specified fees. This form is to be filed within 30 days from the date of Board meeting or within 180 days from the beginning of financial year, whichever is earlier.
Company issues the Appointment Letter to the Cost Auditor.

Preparation of Cost Records

As per Companies (Cost Records and Audit) Rules, 2014 Company including its all branches and units have to maintain Cost Records in Form CRA-1. These are to be maintained in such manner that we can calculate per unit cost of production or cost of operations, cost of sales and margin for each product and activities every financial year. Cost may be calculated on monthly, or quarterly or half yearly or annual basis. Cost Records are required to be maintained on regular basis.

Generally, following processes are involved in Cost Records Preparation.

Company has to create different Cost Centers. Expenses related to each Cost Centre are collected separately under that respective Cost Centre.
Collection of Cost, Classification of Cost, Allocation of Cost and finally calculating Unit Product\ Service Cost are the broad steps involved in the Cost Records Preparation.
As part of Cost Records, Company has to generally maintain records related to Production, Raw Materials, Employee Cost, Utilities, Service Cost Centers, Work-in-Progress, Finished Goods, Overheads and Sales.
Cost Statement of Product produced or Service provided is the final outcome of Cost Records.
Reconciliation of Profit/ (Loss) as per Cost Records and financial accounts is the last and important step of Cost Records Preparation.
Maintenance of Quantitative Records is the important part of the Cost Records Preparation.
Cost Records Preparation should be as per Cost Accounting Standards.

Meaning of Utilities and Format of Cost Sheet of Utilities Produced

In a Manufacturing Company, generally Power, Water, Steam, Effluent treatment, Oxygen, Nitrogen etc. utilities are consumed. Company may purchase the Utility at one location and at another location it may produce its own. Company may purchase or produce the utility at the same location.

Below given is the suggested format of Cost Sheet of Steam produced. Same format may be used for preparing cost sheet of other utilities produced with little variation.

Name of Company—————

Cost Sheet of Steam produced during the month——-

Quantity of Steam Produced —– (M.T.)

Sr. No.	Particulars	Qty (Units)	Rate per Unit	Total Cost	Cost per M.T.
1	Water
2	Fuels like Coal, Furnace Oil, Electricity , Bagasse etc. (Each item to be specified separately)
3	Direct Expenses
4	Consumable Stores
5	Direct Employee Cost
6	Repairs & Maintenance
7	Factory Overheads
8	Depreciation
	Total

Cost Sheet of Manufactured Product

Cost Records preparation helps the company in preparing Cost Sheet of each manufactured product.

Below given is the format of Cost Sheet of manufactured product.

	COST SHEET
	Name of Product
	CTA Heading
	Unit of Measurement
		Production	Finished Goods Purchased	Finished Stock Adjustment	Captive Consumption	Other Adjustments	Quantity Sold
	Current Year
	Previous Year
S no.	Particulars			Current Year		Previous Year
S no.	Particulars			Amount (Rs.)	Rate per unit (Rs.)	Amount (Rs.)	Rate per unit (Rs.)
1	Materials Consumed
2	Process Materials/Chemicals
3	Utilities
4	Direct Employees Cost
5	Direct Expenses
6	Consumable Stores and Spares
7	Repairs and Maintenance
8	Quality Control Expenses
9	Research and Development Expenses
10	Technical know-how Fee / Royalty
11	Depreciation/Amortization
12	Other Production Overheads
13	Industry Specific Operating Expenses
14	Total (1 to 13)
15	Increase/Decrease in Work-in-Progress
16	Less: Credits for Recoveries, if any
17	Primary Packing Cos
18	Cost of Production/Operations
19	Cost of Finished Goods Purchased
20	Total Cost of Production and Purchases (18+19)
21	Increase/Decrease in Stock of F. G.
22	Less: Self/Captive Consumption (incl Samples)
23	Other Adjustments (if any)
24	Cost of Production/ Operation of Product Sold
25	Administrative Overheads
26	Secondary Packing Cost
27	Selling and Distribution Overheads
28	Cost of Sales before Finance Charges (24 to 27)
29	Finance Cost
30	Cost of Sales 28+29
31	Net Sales Realization (Net of Taxes)
32	Margin [Profit/(Loss) as per Cost Accounts]

Filing of Cost Audit Report

Cost Auditor has to give Cost Audit Report to the Company within 180 days from the end of financial Year. Board will consider and examine the report, specially reservations or qualifications, if any.
Company has to file report along with explanations, if any, in Form CRA-4 along with prescribed fees. Report should be filed within 30 days from the date of receipt.
Company has to attach Cost Audit Report XBRL Document (XML File) to the CRA-4 form.

Conclusion

Company should not wait till the year end to start the Cost Records Maintenance. It should be made an ongoing activity. Along with financial accounts, side by side Cost Records should also be prepared. In this way, Process of Cost Records Maintenance and Cost Audit will go on smoothly. Timely availability of Cost Data will also help the company in submitting tenders, optimization of resources and identifying areas of wastage.

References: Companies Cost Records and Audit) Rules, 2014 as amended up to 2019.