COST AUDIT

CONCEPT

It is an audit process for verifying the cost of manufacture or production of any article, on
the basis of accounts as regards utilisation of material or labour or other items of costs,
maintained by the company.
LEGAL PROVISIONS Cost Audit is covered by Section 148 of the Companies Act, 2013. The audit conducted
under this section shall be in addition to the audit conducted under section 143.
As per the section 148 the Central Government may by order specify audit of items of
cost in respect of certain companies.
Further, the Central Government may, by order, in respect of such class of companies
engaged in the production of such goods or providing such services as may be prescribed,
direct that particulars relating to the utilisation of material or labour or to other items of
cost as may be prescribed shall also be included in the books of account kept by that class
of companies:
Provided that the Central Government shall, before issuing such order in respect of any
class of companies regulated under a special Act, consult the regulatory body constituted
or established under such special Act.
If the Central Government is of the opinion, that it is necessary to do so, it may, by order,
direct that the audit of cost records of class of companies, which are covered under sub
section (1) and which have a net worth of such amount as may be prescribed or a turnover
of such amount as may be prescribed, shall be conducted in the manner specified in the
order.
WHO CAN BE COST
The audit shall be conducted by a Cost Accountant in Practice who shall be appointed by
AUDITOR
the Board of such remuneration as may be determined by the members in such manner as
may be prescribed:
Provided that no person appointed under section 139 as an auditor of the company shall be
appointed for conducting the audit of cost records: (Statutory Auditor & Cost Auditor
cannot be same person)
Provided further that the auditor conducting the cost audit shall comply with the cost
auditing standards ("cost auditing standards" mean such standards as are issued by the
Institute of Cost and Works Accountants of India, constituted under the Cost and Works
Accountants Act, 1959, with the approval of the Central Government).
APPOINTMENT OF
As per rule 14 of the Companies (Audit and Auditors) Rules, 2014
COST AUDITOR
(a) in the case of companies which are required to constitute an audit committee(i) the Board shall appoint an individual, who is a cost accountant in practice, or a firm of
cost accountants in practice, as cost auditor on the recommendations of the Audit
committee, which shall also recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall be considered
and approved by the Board of Directors and ratified subsequently by the shareholders;
(b) in the case of other companies which are not required to constitute an audit committee,
the Board shall appoint an individual who is a cost accountant in practice or a firm of cost
accountants in practice as cost auditor and the remuneration of such cost auditor shall be
ratified by shareholders subsequently.
QUALIFICATION,
The qualifications, disqualifications, rights, duties and obligations applicable to auditors
DISQUALIFICATION, under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed
RIGHTS, DUTIES
under this section and it shall be the duty of the company to give all assistance and facilities
AND OBLIGATIONS
to the cost auditor appointed under this section for auditing the cost records of the
OF COST AUDITOR
company:
Provided that the report on the audit of cost records shall be submitted by the cost
accountant in practice to the Board of Directors of the company.
SUBMISSION OF
A company shall within 30 days from the date of receipt of a copy of the cost audit report
COST AUDIT
prepared (in pursuance of a direction issued by Central Government) furnish the Central
REPORT
Government with such report along with full information and explanation on every
reservation or qualification contained therein. If, after considering the cost audit report
referred to under this section and the, information and explanation furnished by the
company as above, the Central Government is of the opinion, that any further information
or explanation is necessary, it may call for such further information and explanation and the
company shall furnish the same within such time as may be specified by that Government.

Cost Audit will be advantageous to the stockholders in the following manner:

(1) To Management
(i) Reliability of data for price fixing, control and decision making.
(ii) Waste control and consequently cost reduction.
(iii) Through the system of budgetary control and standard costing, cost control is established.
(iv) Proper valuation of closing stock, work in progress.
(2) To Society
(i) Cost Audit is often introduced for the purpose of price fixation. Customers are saved from exploitation through proper costing of
products and services.
(ii) Since price increase by some industries is not allowed without proper justification as to increase in cost of production, inflation
through price hikes can be controlled and consumers can maintain their standard of living.
(3) To Shareholders
Cost Audit ensures that proper records are kept as to purchases and utilization of materials and expenses incurred on wages etc. It
also makes sure that the valuation of closing stock and work-in-progress is on a fair basis. The shareholders are assured about the
calculation of the profitability and thus return on their investments.
(4) To Government
(i) In a cost plus contract, price fixation is properly calculated.
(ii) Price ceiling for essential commodities and thus undue profiteering is checked.
(iii) Able to monitor inefficient units
(iv) Decision support on Government protection to certain industries.
(v) Settlement of trade disputes.
(vi) Cost audit and consequent management action can create a healthy competition among the various units in an Industry. This
imposes an automatic check on inflation.
Application Of Cost Records
( First) Companies Engaged In The Production Of Following Goods In Strategic Sectors,
Such As: Machinery And Mechanical Appliances Used In Defence, Space
And Atomic Energy Sectors Excluding Any Ancillary Item Or Items.
Turbo Jets And Turbo Propellers
Arms And Ammunitions

Propellant Powders; Prepared Explosives, (Other Than Propellant

Powders); Safety Fuses; Detonating Fuses; Percussion Or Detonating
Caps; Igniters; Electric Detonators; Radar Apparatus, Radio
Navigational Aid Apparatus And Radio Remote Control Apparatus
Tanks And Other Armoured Fighting Vehicles, Motorised, Whether Or
Not Fitted With Weapons And Parts Of Such Vehicles, That Are Funded

Above clause shall be applicable only if if the net worth of the company is
rupees five hundred crore or more or the turnover is rupees five hundred
crore or more

(Second) Companies Engaged In An Industry Regulated By A Sectoral Regulator Or A

Ministry Or Department Of Central Government:
Port services
Aeronautical services
Telecommunication services
Generation, transmission, distribution and supply of electricity
Roads and other infrastructure projects
Drugs and Pharmaceuticals
Fertilisers
Sugar and industrial alcohol
Petroleum products regulated by the Petroleum and Natural Gas
Regulatory Board
Rubber and allied products being regulated by the Rubber Board

For the purposes of above clause, the thresholds limit shall be as under:(i)
(ii)

in the case of a multi-product or a multi services company, any

product or a service for which the individual turnover is rupees fifty
crore or more;
in the case of a company, producing any one specific product or
service, if the net worth of the company is rupees one hundred and
fifty crore or more or the turnover is rupees twenty five crore or
more.
In the case of companies engaged in an industry regulated by a sectoral
regulator, the requirements of sectoral regulator regarding cost records
shall be taken into account.

(Second) Companies operating in areas involving public interest such as:

Railway or tramway locomotives, rolling stock, railway or tramway

fixtures and fittings, mechanical traffic signalling equipments of all
kind
Mineral products including cement
Ores
Mineral fuels (other than Petroleum), mineral oils etc
Base metals
Inorganic chemicals, organic or inorganic compounds of precious
metals, rare-earth metals of radioactive elements or isotopes, and
Organic Chemicals
Jute and Jute Products
Edible Oil under Administrative Price Mechanism
Construction Industry
Companies engaged in health services viz. functioning as or running
hospitals, diagnostic centres, clinical centres or test laboratories
Companies engaged in education services, other than such similar
services falling under philanthropy or as part of social spend which do
not form part of any business.

For the purposes of above clause the thresholds limit shall be as under:(i)
(ii)

In the case of a multi-product or a multi services company any product or a

service for which the individual turnover (from such specific product or such
specific service) is rupees fifty crore or more;
In the case of a company producing any one specific product or service, if
the net worth of the company is rupees one hundred and fifty crore or more
or the turnover is rupees twenty five crore or more.

(Others) Companies (including foreign companies other than those having only
liaison offices) engaged in the production, import and supply or trading of following
medical devices, namely: Cardiac Stents
Drug Eluting Stents
Catheters
Intra Ocular Lenses
Bone Cements
Heart Valves
Orthopaedic Implants
Internal Prosthetic Replacements
Scalp Vein Set

Deep Brain Stimulator

Ventricular peripheral Shud
Spinal Implants
Automatic Impalpable Cardiac Deflobillator
Pacemaker (temporary and permanent)
patent ductus arteriosus, atrial septal defect and ventricular septal
defect closure device
Cardiac Re-synchronize Therapy
Urethra Spinicture Devices
Sling male or female
Prostate occlusion device
Urethral Stents

For the purposes of above clause the thresholds limit shall be as under:(i)

in the case of a company engaged in multiple products, any product or

device for which the individual turnover (from such specific product or
device) is rupees ten crore or more, or one third of the turnover,
whichever is less.
(ii) in the case of a company engaged in one specific product or device, if
it has net worth of rupees one hundred and fifty crore or more or the
turnover is rupees twenty five crores or more;

(ii)

Applicability for cost audit

Every company engaged in a strategic industry and covered under (First) shall be
required to get its cost records audited in accordance with these rules.

In the case of a multi-product or a multi services company specified in(Second) , the

requirement for cost audit shall apply to a product or a service for which the
individual turnover (from such specific product or such specific service) is rupees one
hundred crore or more;

In the case of a company producing any one specific product or service specified in
(Second), the requirement for cost audit shall apply if the net worth of the company
is rupees five hundred crore or more or the turnover from such product or such
service is rupees one hundred crore or more.

In the case of a company engaged in medical products or devices referred to in (Others)

which has multiple products or devices (i.e. a company producing, importing and
supplying or trading in more than one medical device or product), the
requirement for cost audit shall apply to a medical device or product for which
the individual turnover (from such specific medical device or product) is rupees
ten crore or more, or one third of the turnover, whichever is less
which has only one product or device (i.e. a company producing, importing and
supplying or trading one medical device or product), the requirement for cost
audit shall apply if the net worth of the company is rupees one hundred fifty
crores or more or the turnover is rupees twenty five crores or more.