What is Cost Audit
29

Sep 2020

Cost audit is the authentication of cost accounts to discover the accuracy of cost accounting records. It is a method to ensure that cost accounting records track the costing principles, procedures, plans, and objectives.

We can also say that cost audit is the comprehensive checking as well as the verification of the accuracy of costing techniques, cost accounts, and systems. In any manufacturing province or service organization, it is generally felt necessary to calculate the correct cost of services to correctly charge customers.

For this motive, cost accounts or costing records are kept. But, the maintenance of cost accounts is not enough. It is necessary to ensure that these cost accounts and audit records are correct to discover the true and accurate cost of products and services. Hence, there is a requirement to get the costing records properly checked and audited by a properly certified, trained, and approved auditors in Dubai.

Scope of Cost Audit

The cost audit verifies the following areas

1.Services

Use of water, power, fuel, steam, electricity, material, labor, and additional costs like overheads assigned to the service department.

2.Wages and Salaries

Upkeeping of employment and attendance records, records of overtime and idle time, allotment of wages and salaries among several departments, and those associated with the capital work.

3.Overhead

The overheads such as production, selling, distribution, and administration should be assigned on a reasonable basis. The cost auditor ensures a fair and unbiased distribution of overheads between several departments, appeasement of the cost records with that of financial records, overhead recovery rates, and basis for assigning of cost between fixed and variable.

4.Depreciation

Upkeeping of fixed assets registers with quantitative factors, situation, method of computing depreciation, allocation of depreciation with respect to the common assets.

5.Production

Reports on daily production, outlines from daily to monthly, monthly to yearly, comparison with ended records, and budgeted targets consisting of unusual losses, work-in-progress, etc.

6.Work-in-Progress

Maintenance of records such as job cards, cost ledger, work order, etc. and their costing method.

7.Stock Verification

Stock records for inventories, both finished and unfinished products, tools, machinery, spares, and stores, etc., their values, supply procedure, and balances.

8.Utilization of Capacity

In a financial audit, plant utilization and capacity utilization are not considered in detail. Under this category, the cost of auditor's examination covers total available hours, standards hours, planned hours, and actual hours worked.

The cost auditor’s examination also covers royalty payments, productivity, company policies with respect to inventory management,  internal control, internal audit, export performance, bottlenecks in the production process, cost reduction,  inter-company transactions, etc. Therefore, from the practical benefit point of view, the scope of cost audit is much extensive than the financial audit.

Types of Cost Audit

Following are the important types of cost audit

Statutory Audit

Statutory audit is the compulsory audit that needs upkeeping of the related books and accounts of designated establishments. The chief objectives of the statutory audit are that the government wants to establish the relationship between costs and prices.

 To know more in detail about the statutory audit services in Dubai, You can visit our blog on Statutory Audit.

Propriety Audit

The propriety Audit is stated as the executive actions and plans supporting the organization's finance and expenditure. The auditor has to decide whether the planned expenditure is designed to give maximum results.

Efficiency Audit

An efficiency Audit is measuring whether corporate plans have been efficiently executed or not. It is concerned with the use of resources in an economical and most lucrative manner to achieve the objectives of the concern.

Objectives of Cost Audit

Let us discuss the objectives of cost audit under the following categories

  • General Objectives
  • Social Objectives

General Objectives of Cost Audit

  1. Detecting errors and frauds
  2. Verifying the sufficiency of the books of accounts and the accounting services in Dubai.
  3. Correct costing of work-in-progress.
  4. Verifying the total cost of each product, operation, process, and job.
  5. Verifying the inter-company transactions and the moderateness of the price charged for inter-company transfers.
  6. Verifying the statistical statements and all records to be given to the Directorate General of Technical Development and Central Excise in order to see that these are restored.
  7. Providing assistance to the management by exposing the deficiencies to its notice and thereby avoid unsuitable use of resources like capital, labor, raw material, etc.
  8. Advising the management for taking on alternative courses of action by drawing up the cost plans.

Social Objectives of Cost Audit

  1. Protecting the interest of the shareholders and investors
  2. Effectively utilizing the resources.
  3. Ensuring the quality of the operation of the corporate management.
  4. Overall development in the socio-economic structure.

Advantages of Cost Audit

The main advantage of a cost audit is that management will be sure to get definitive data for its objectives, such as price-fixing, decision-making, control, etc. The existence of such a system of the audit will also be vital for maintaining control and internal check and will be of utmost help to even financial audit.

Let us discuss the advantages briefly, as follows.

  1. A close check will be kept on all wastages, and they will be properly located and reported.
  2. Production inefficiencies will be located and converted into monetary terms.
  3. Management, by exception, will be possible by the fixation of individual responsibility.
  4. The system of budgetary control and standard costing will be greatly eased with cost audit at the hands of a certified cost accountant.
  5. Audited cost data helps the statutory auditor to establish the value of stocks, payment of managerial personnel, etc., with simplicity and accuracy.

Why JAXA?

JAXA Chartered Accountants is a financial consultant in Dubai, ISO 9001-2015 certified firm of adept Chartered Accountants teams providing a wide range of services including, Accounting and Management, Auditing, and Software Consultancy services customized to client’s needs. Devising of management reports, Maintaining accounting records and database, Business settlements, etc. is some of the JAXA accounting services.

Contact us to get more information. We would be delighted to help you at any point of time.