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Cost Audit is the core field for a practicing Cost & Management Accountant. Institute of ICAI-CMA has recently started MCBT (Mandatory Capacity Building Training). But unfortunately, most of the new practicing Cost & Management Accountant are not aware of the practical approach to conduct the Cost Audit in any industry due to lack of industry experience. My article is dedicated to them for their knowledge and enrichment.


  • Cost Audit has been first introduced in 1965 when Companies Act 1956 had been amended and Section 233B has been inserted.
    At that time, the Cost Audit was based on Cost Records prepared as per Cost Accounting Record Rules
  • Central Government used to declare which industries should be covered under Cost Audit
  • Cost Records were prepared on the basis of industry wise specific formats as per Cost Accounting Record Rules.
  • Companies (Cost Records & Report) Rules, 2014 changed the scenario and at present except for a few industries all other industries covered under Cost Audit do not maintain separate Cost Records.
  • Now Cost Audit is Report based which is same for all industries. Previously it was based on industry-based Record.
  • Now Cost Audit is also Sector Specific – Regulated Sector & Un-Regulated Sector.
  • In Regulated Sector, there are 6 industries-Telecommunication, Power, Petroleum Products, Drugs & Pharmaceuticals, Fertilizers and Sugar & Industrial Alcohol. All other industries (33 nos) are in Un-Regulated Sector.

Basics of Cost Audit

  • Cost Audit is governed by Companies (Cost Records & Audit) Rules, 2014 amended up to 15th October, 2019 framed as per Sec 148 of Companies Act 2013
  • Cost Audit is applicable for industries to which Central Government directs to do so U/s 148 (2). At present total 39 industries are covered under Cost Audit. Out of which 6 industries are under regulated sector and 33 industries are under un regulated sector.
  • In Regulated Sector if overall turnover of the Company is more than Rs 50 Cr or for any product for which Cost Audit has been ordered, turnover exceeds Rs 25 Cr, it will come under Cost Audit
  • In Un-Regulated Sector if overall turnover of the Company is more than Rs 100 Cr or for any product for which Cost Audit has been ordered, turnover exceeds Rs 35 Cr, it will come under Cost Audit
  • Cost Auditor should be appointed within one hundred and eighty days of the commencement of every financial year in the meeting of Board of Directors on the recommendation of Audit Committee. However, fees of Cost Auditor should be ratified in the next AGM.
  • The Auditor should be informed about his appointment letter and a notice of such appointment should be filed in MCA portal as per CRA 2 with a fee within 30 days of such appointment or within 180 days of commencement of the financial year, whichever is earlier.
  • The Cost Auditor should submit his Report in CRA 3 to the Management within 180 days of closing of the financial year for which he was appointed.
  • Before submission of Cost Audit Report by the Cost Auditor, the Annexure to Cost Audit must be approved by the Board of Directors on the recommendation of Audit Committee.
  • The Company must submit Cost Audit Report in CRA 4 along with Management Replies in MCA portal within 30 days of receipt of the Cost Audit Report in XBRL mode

Practical Approach to Conduct Cost Audit


a) Visit of Factory/office/ working place (Production Cost Centers) to inspect various statutory records.

b) Visit of Service Cost Centers, Workshop, Hospital, Administrative office etc. for assessment of functionality, methodology adopted and role of each service unit towards production, Cost incurred in each service unit and treatment in Cost.

c) Discussion with Head of the Departments to assess the weaknesses and strengths of the company, functionality and methodology adopted in the company, their roles in their functional areas etc.

d) Obtaining their suggestion for optimum performance of man, machine and overall company performance.

e) Collection of Quantitative data

f) Verification and Examination of Cost Records

g) Analysis of Cost data, Physical Data & Trend analysis

h) Verification & Examination of Annexure to Cost Audit report

h) Consolidation of Annexure to Cost Audit Report in case of Lead Auditor

Collection of Physical & Cost Data/ Information/Statement:

1. Physical copy of audited P & L A/C and Balance Sheet along with Cost Centre wise trial balance

2. Groupings of financial codes duly tallied with trial balance

3. List of fore closed contracts

4. Hindrance Register maintained for civil contracts, Transportation and other contractual works

5. Certified Copy of installed Capacity Assessment done by Engineering or concerned department

6. Statutory Records relating to production, dispatch and closing stock

7. Internal Audit Report on Cost Records

8. Monthly MIS Report, if any containing all data relating to production, machine utilization, dispatch and other physical data

9. Cost Centre wise consumption of utilities with norms vis a vis previous year

10. Cost Centre wise capacity available and utilization with respective norms as indicated in Director’s Report vis a vis previous year

11. Mandays lost due to strike or abnormal situation

12. Month wise Power analysis statement indicating penalty levied, contract demand and recorded demand, power factor for industrial and domestic both current year vis a vis previous year

13. Computation of Activity wise Depreciation

14. Year wise break up of incentive credited in sales account and any other expenses or income not related to the year under report

15. Year wise break up of credit notes issued and incentive earned during the year under audit

16. Variance analysis with budget and previous year in budget heads with justification

17. Cost Finance Reconciliation Statements with specific reasons of variation in Budget head

18. Cost Accounting Policy of the Company

Analysis of Cost and physical data

a) Comparison of Capacity utilization of machines and mines with previous year and with similar mines

b) Comparison of Specific Consumption of HSD Oil, Power etc with previous year and with similar mines

c) Comparison of various Cost Elements with previous year and with similar mines

d) Comparison of Powder Factor, Detonator Factor with previous year and with similar mines in case of Mining Industries

e) Co relate Cost Element with corresponding quantitative data

f) other analysis as required during audit

Trend Analysis

Trend analysis of past 5 years in respect of major Cost Elements so as to assess the extent of Cost Control in vogue and to identify any abnormality if any.

Major Area on which comments to be made

1. Violation of Cost Accounting Standards

2. Adequacy of Internal audit on Cost Records

3. Record Keeping system and ascertainment of True Cost of Production

4. Cost Centre wise Productivity of Man and machine

5. Cost Centre wise Machine availability and utilization performances

6. Profitability of Cost Centre

7. Cost Centre Wise Capacity Utilization

8. Performance of Ongoing Projects, Projects having time over run and cost over run

9. Performance of Controllable Cost

10. Comments on Correctness of Sales billing

11. Overall Performance of the mine

12. Compliance of Cost Accounting Standards

13. Review of Internal audit Report, Internal Control and Internal Check System

14. Variance analysis

15. Other relevant points which may crop up during audit


Cost Audit is not only for ascertainment of True Cost of Production/Service or to certify statutory requirements, but also for value addition to the Companies overall performances by pinpointing inefficiencies and wasteful expenditure. If a Cost Auditor works aiming to this, the Company as well us our profession will be benefitted.

About the Author: CMA Alokesh Dutta, B.Sc., FCMA – A Practicing Cost & Management Accountant having more than 30 years Industry Experience. | Email :

Author Bio

CMA Alokesh Dutta, aged 62 years is a Bachelors in Science from Kolkata University, and is a Fellow Member of The Institute of Cost Accountants of India. He is also a registered authorised GST Practitioner under CGST Act, 2017. He is also a Senior working Partner of R M Bansal & Co, Cost Acco View Full Profile

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May 2024