Cost Audit

 Cost audit -Definition 

Smith and Day:-Cost audit mean "detailed checking of Costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of accounting".

The Institute of Cost and Works  Accountant of India "cost audit can be defined as verification of the correctness of cost accounts and adherence of the cost accounting principles, plans and procedures."

Objectives of Cost Audit 

The basic objectives of cost audit and follow:-

1. To verify the arithmetical accuracy of cost accountancy entries in the books of accounts.

2. To find out whether cost accounts have been properly  maintained according to the principals of Costing employed in the industry concerned.

3. To detect the errors of principals of cost accountancy. 

4. To detect the frauds that are made in cost records, which might have committed intentionally or otherwise.

5. To verify the total cost of each product, process and job for seeing that they are accurately ascertained.

6. To help management to find out  inefficiencies in the use of man, machine and material. 

7. To verify the adequacy of the books of accounts and record relating to cost.

8. To find out whether each item of expenditure involved into the relevant components of the goods manufactured or produced has been properly incurred or not.

9. To value accurately the value of working progress and closing stock. 

10. To advise the management for the adoption of alternative course of action

11. To verify that the cost statement are properly drawn up as per records.

12. To report to appropriate authority as to the state of cost affairs of the company.

Advantages of Cost Audit 

1. Cost audit provides reliable cost data for managerial decision. 

2. It helps the management in finding out the correct cost of production. 

3. It helps the management to regulate production.

4. It helps in obtaining licences for expansion or diversification of the various product-lines of the business.

5. It is a basis for inter divisional performance. 

6. It reduces the cost of production through plugging loop holes relating to wastage of material, labour and overheads. 

7. It helps in comparing actual results with budgeted and points out the areas where management action is more essential. 

8. It ensure that the cost accounts have been maintained in accordance with the principles of costing employed in the particular industry.

9. It can stop the capital erosion by constant watch on the better plant utilisation discontinuing sick lines and elimination of wastage.

Dr Sucheta Dalvi

HOD of Commerce 

Tikaram Jagannath College, khadki 

Cost centre and Cost Unit

 

Cost Centre and Cost Unit 

The organisation is divided into small parts or sections to ascertain cost.   Each small section is treated as a call centre of which cost is ascertained. A cost centre is defined by CIMA, London as "a location, person, or item of equipment for which costs may be ascertained and used for the purpose of control'.

It may be a division, department, job or job order, a single product or a bunch of products, it may be a person also.

Cost centres are primarily of two types 

a) Personal call centres -which consist of a person or a group of persons 

b)  Impersonal cost centres- which consist of a location or an item of equipment or a group of equipment

From the functional point of view cost centres may be of the following two types:

1) Production cost centres:-  these are those cost centres where actual production work takes place.

 for example weaving department in a textile mill a shop in a steel mill, a cane-crushing shop in a sugar mill etc 

2) Service call centre:- cost centres that are ancillary to and render services to production are known as service cost centres. e g  powerhouse, tool room, store department, repairs and maintenance shop, canteen etc 

A cost accountant sets up cost centres to enable him to ascertain the cost he needs to know. A cost centre is charged with all the costs that relate to it, for example, if the machine is a cost centre, it will be charged with the cost of power, light, depreciation and its share of rent etc  The purpose of ascertaining the cost of a cost centre is to control the cost. The person in charge of a cost centre is held responsible for the control of the cost of that particular cost centre.

Cost Unit

A cost unit is defined by CIMA London as a unit of product or service in relation to which cost or asserting ascertain for example in a sugar mail the cost per turn off sugar in a textile male the cost per metre of cloth maybe ascertain does a tonne of sugar and meter of cloth are cost units in short cost unit is unit of measurement of cost 

Broadly cost units may be of two types as explain below 

Units of production -for example a ream of paper, a turn off Steel a meter of cable etc

Units of service- for example passenger miles, cinema seats, consulting hours etc a few more example of cost units in various industries are as follows 

Cement- Tonne

Chemicals:- Tonnes, kilogram, litre, gallon etc

Bricks -1000 bricks or 500 bricks

Soft drink- a crate of 24 bottles or 12 bottles

Hospital - bed per day or patient 

Interior decoration-each job 

Electricity- kilowatt hours 

Transport passenger- kilometre or tonne kilometre 

Printing press- 1000 copies 

Building construction each building or flat 

Hotel- room per day 

Education -cost per student

Petroleum- barrel or Tonne or  litre