Cost Audit: Planning, Intro, Validation, Value Addition – Detailed

Cost Audit: With the help of this article I will try to explain overall procedure in the cost audit. First step in the cost audit is Trial Balance.

Raju Choudhary

cost audit

Cost Audit: This article is important because this is the audit for which we cost accountants are known. But, if we really ask ourselves that are we really have practical knowledge of cost audit? Out of 10 only 1 or 2 cost accountants are working in the field of costing? Our purpose must be to give value addition to company/ client rather than only compliance.

Cost Audit

Cost Audit is even though historical in nature but it has potential of creating cost consciousness and cost competitiveness in the businesses. If we want to compete with china in near future then surely we must have Cost Competitiveness among Indian industry

We need to think on it.

With the help of this article I will try to explain overall procedure in the cost audit. First step in the cost audit is Trial Balance. In fact this is the first and foremost requirement. The next step is you have to bifurcate Finance Heads of expenses into Costing Heads.


Content in this Article

For your knowledge followings are the few examples:-

ExpensesFinance HeadCosting Head
Packing MaterialOther General ExpensesSecondary Packing Cost
Water charges (plant)Other General ExpensesAdmin
Sales Promotion ExpenseOther General ExpensesSelling and Dist
Postage – CourierOther General ExpensesAdmin

Above examples is only illustration purpose. Then you have to identify the expenses and incomes which are not form part of cost audit. (Profit Reco)

Incomes not considered in cost accounts:Expenses not considered in cost accounts:
Interest IncomeBad trade and other receivables, loans and advances written off
Dividend income from long-term investmentsNet Loss on foreign currency transactions
Other non-operating incomeProvision for doubtful trade receivables and advances (net) CSR

You also need to prepare Revenue statement…

In this sheet you have to prepare revenue statement product and service wise. ( it means if company have 3 major product classes and 2 service then sum of all of these.)

MCA has covered the healthcare services under the cost audit wide the companies (Cost Records and Audit) Rules, 2014 dated 30th June 2014. The format for the service cost sheet is very generic for all covered service industries

The requirement of reporting under the annexure to cost audit report is not only to segregate the non-operating incomes and expenses and disclose the Financials vs. Costing Reconciliation. The hospitals have to prepare the cost accounting records based on the Specialty Care wise as mentioned above and in addition to that Hospitals shall prepare the Cost Accounting Records as per the clinical practices viz. Critical care (ICU), Diagnostic services, Radiology and Imaging Services, Emergency Procedure, Operating theatres services, Wards services, Pharmacy, Special procedures-operations, Special treatment rooms, Therapies, Laboratory, Blood bank, Biomedical waste management, Mortuary Management, etc.

Validation :

Total of all above must be match with your Financials You must have quantitative and value wise details of Utilities in respective company. Materials quantitative details and value is also required. (Bifurcate material consumption in to Domestic and Imported)

You also need to calculate VALUE ADDITION statement (which simply means how much company earns and how it utilized the same)

Value Addition:

1Gross Sales (excluding returns)
2Less: Excise duty, etc
3Net Sales
4Add: Export Incentives
5Add/Less: Adjustment in Finish Stocks
6Less: Cost of bought out inputs
(a) Cost of Materials Consumed
(b) Process Materials/Chemicals
(c) Consumption of Stores and Spares
(d) Utilities (e.g. power and fuel)
(e) Others, if any
Total Cost of bought out inputs
7Value Added
8Add: Income from any other sources
9Add:Exceptional,ExtraOrdinary andOtherComprehensive Income, if any
10Earnings available for distribution

Distribution of Earnings to:

1Employees like salaries and wages, retirement benefits, etc.
2Shareholders as dividend
3Company as retained funds
4Government as taxes (Specify)
5Exceptional and Extra Ordinary Expenses, if any
6Other if any
7Total distribution of earnings

One important steps in cost audit is to prepare cost sheet product wise. For this take base actual production and sales quantity as per expenses Sales Quantity is basis for below expenses for other actual production qty

Secondary Packing Cost
Selling and Distribution Overheads
Interest and Financing Charges

You need to extract the data of production made in given time period from system.

Other important compliance is Financials Ratios and RPT. For this you can take data from Financials data.


With the help of this data I just tried to give idea about cost audit and what kind of data required for it. Hope you will find this one helpful.


Raju Choudhary

Article by Raju Choudhary Raju has written 810 articles. If you like This post, you can follow CAknowledge on Twitter. Subscribe to CAknowledge feed via RSS or EMAIL to receive instant updates.


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