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In this Feb 2003 issue of On
Target :
The Cost Audit: Should it be Made
Mandatory?
The Institute of Certified Management Accountants believes
that bodies involved in the management accounting profession
should urge the Governments of the countries in which their
members are represented to initiate suitable amendments to the
Companies Acts of these countries so as to make the cost audit
mandatory for all the companies on the lines of financial audit,
and to mandate the appointment of cost auditors at Annual
General Meetings (AGMs) of the companies on par with statutory
auditors.
Governments then would need to recognise cost accounting
guidelines (or standards) released by the various Cost
Accounting Standard Boards such as that newly constituted by the
Institute.
Australia and other industrialised countries have been
lagging in this respect. The Cost Audit has been in practice
since 1956 in India and since 1984 in Pakistan and in Bangladesh
since 1994. In Bangladesh for instance, its Companies Act of
1994 has made provision for audit of cost accounts by Cost and
Management Accountants for the companies engaged in production,
distribution, marketing, transportation, processing,
manufacturing, milling, extraction and mining activities. In
India, The Institute of Cost and Works Accountants (ICWAI) has
gone further, by now requesting the Government to make it
mandatory for the companies to follow cost accounting standards
issued wherever they were required to maintain cost accounting
records under Section 209 (1)(d) of the Indian Companies Act.
The ICWAI believes that it should be made obligatory for
companies to maintain cost accounting records as per their Cost
Accounting Standards in a uniform way. Stating that only little
over 2,400 cost accountants of the 35,000-odd qualified in India
were currently practicing the profession and only around 3,000
units were availing of their services, the ICWAI President and
the Vice-President said the measures suggested to bring cost
auditors on par with financial auditors would help utilize the
services of cost accountants and boost economic growth and the
competitive edge of the Indian industry.
The Institute of Certified Management Accountants (Australia)
believes that a Cost Audit should be performed not merely for
employments sake but to provide a Value-Adding service to
companies. Also, with the issue of Corporate Governance high on
most regulators’ agendas, a cost audit will form the platform
that ensures that a company is managing an important aspect of
its competitive advantage in an appropriate manner. The benefits
of Cost Audit are many fold. It can help management in
diagnosing operational inefficiency at all levels and suggest
remedial measures to the shareholders. To the consumer; it helps
getting the product at lowest possible price by reducing wastage
and inefficiencies; and to the Government it gives actual
picture of an industry resulting in formulation of satisfactory
tariff and taxation policies.
The Institute’s syllabus has been designed keeping in view
the changing global environment, focuses on areas such as
management accountancy, performance management, information
system and technology, quantitative methods, operations and
project management control, strategic management and marketing,
and financial strategy and reporting.
A Cost Audit Report should briefly describe the cost
accounting system existing in the company, keeping in view the
requirements of the Cost Accounting Guidelines and Standards
applicable to the class of companies manufacturing the product
or providing the service, and also its adequacy or otherwise to
determine correctly the cost of production, cost of sales, sales
realisation and margin of the product and services.
Typically, the Cost Audit will cover the following
areas :
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The adequacy or otherwise of the cost accounting system
including inventory valuation, and suggestions for the
improvement.
-
The adequacy or otherwise of the budgetary control system.
-
Areas where the company is incurring losses or where there is
considerable decline in profitability, the cost auditor should
comment on the reasons, including indicative break-even points.
The cost auditor should also comment on the default, if any on
the payments due to the Government, financial institutions and
banks, penal interest levied thereon and its impact on the cost
of sales and profitability;
-
Steps required for strengthening the company under a competitive
environment, especially under a Cost Leadership strategy.
-
Comment on comparative profitability and pricing policy of the
company for domestic and export sales.
-
Comment on the scope and performance of internal audit of cost
records,
-
The Cost Auditor should also suggest measures for making further
improvements in the performance in respect of cost control and
cost reduction.
It is expected that most Cost Audits will report on the process
of manufacture, providing a brief note regarding the process of
manufacture along with flow chart covering production, utility
and service department of the product. Areas covered would
typically include :
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cost information, such as the major input materials /
components consumed;
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standard/ actual consumption of input materials per unit;
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break-up of cost of input materials imported during the year
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standard/ actual consumption of power, fuel and utilities in
terms of quantity per unit of production ;
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salaries and wages; repairs and maintenance;
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fixed assets register and depreciation and lease rent;
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overheads, and allocation drivers (e.g. ABC);
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research and development expenses; royalty and technical know
how charges;
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quality control expenses; pollution control expenses;
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abnormal non-recurring costs;
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inventory valuation (at the end of the year) ;
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sales of the products and the margin per unit of output;
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competitive margin against imports;
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value addition and distribution of earnings;
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financial position and ratio analysis;
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capitalisation of revenue expenditure;
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related party transactions;
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profit reconciliation;
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qualitative information (e.g. the Balanced Scorecard);
The report should also briefly specify changes, if any, made
in the costing system; including the basis of inventory
valuation; method of overhead allocation; apportionment to cost
centers/departments and final absorption to the product under
reference etc., during the current financial year as compared to
the previous financial year.
The Institute would like to hear its members views on a
applicability of a mandatory cost audit in organisations in
their countries
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