Carr

Companies (Cost Records and Audit) Rules, 2014 Cost and Management Audit 2.
[issued as per the “subordinate legislative power” of the central government given in Section 469]
FYK - HISTORY OF RULES IN INDIA2

There have been two major transformations in the cost records and audit rules over the
last few decades:
1) Company based regime shifted to an industry-based regime - Prior to 2001, cost
audit orders were issued on individual companies on selective basis in an adhoc
manner. This was amended to industry-based orders. The erstwhile ‘Company’ based
approach was not only discriminatory but it also narrowed the scope of Cost Audit
to a handful of Companies.
2) Multiplicity of Rules to Unity of Rules –

Earlier MCA notified separate cost
accounting record rules for various
industries. This implied that multi-
product companies were required to
comply with multiple rules and, hence,
multiple cost audit reports were made
for the same company. However, this
was changed to a unified system of
Rules, whereby all the Rules were
merged into single set of Rules.
Therefore, the menace of multiplicity of
Cost records and Cost audit report was
resolved.
The adjacent picture showcases an Order

dated 2nd May 2011, which enumerates separate accounting record rules for separate
products, viz. bulk drugs, formulations, fertilisers etc. In the current scenario,
accounting record rules are the same for all the products under consideration.
1
As amended by Companies (Cost Records and Audit) Amendment Rules, 2015, 2016, 2017, 2018 and 2019. Refer
Annexure for the copy notification of these Rules.
2
Extracted from the presentation dated 17.09.2014 made by the Institute of Cost Accountants of India before the
Expert Committee
(https://icmai.in/upload/Institute/ExpertCommittee/ICAIPresentationtoExpertCommittee170914Final.pdf)
Email ID – nikhil10b@rediffmail.com; Mob.: +91 96439 29913

YouTube Channel – CA CS CMA Nikkhil Gupta; - guptanikkhil24@gmail.com (only for FB)
Companies (Cost Records and Audit) Rules, 2014 Cost and Management Audit 2.2
Rule 1: Short title and commencement
These rules may be called the Companies (Cost Records and Audit) Rules, 2014.
They shall come into force on the date of publication in the Official Gazette, i.e. 30 June 2014
Rule 2: Definitions
Cost Accountant in practice means a cost accountant as defined in the Cost and Works Accountants
Act, 1959, who holds a valid certificate of practice and who is deemed to be in practice thereof, and
includes a firm or limited liability partnership of cost accountants
Cost auditor means a Cost Accountant in practice, who is appointed by the Board
Cost audit report means the report duly audited and signed by the cost auditor including attachment,
annexure, qualifications or observations etc. to cost audit report. Nikkhil ₲upt@
Cost Records means books of account relating to - 1) utilisation of materials, 2) utilisation of

labour and 3) other items of cost as applicable to the production of goods or provision of services
as provided in section 148 of the Act and these rules. (June 2015 & December 2017)
Indian Accounting Standards means Indian Accounting Standards as referred to in Companies
(Indian Accounting Standards) Rules, 2015
Rule 3: Application of Cost Records
Any Company (including foreign company) engaged in production of goods or providing services,
specified in the Tables below, shall be required to prepare cost records for such products or services
in their books of accounts:
Category A: Regulated Sector – 6 industries
Industry Regulator
Telecommunication services [It includes Telecom Regulatory Authority of India
transmission or reception of signs, signals, (Telecom Regulatory Authority of India Act,
writing, images and sounds or intelligence of 1997)
any nature, broadcasting services]
Generation, transmission, distribution and Relevant Regulatory Authority
supply of electricity3 (Electricity Act, 2003)
Petroleum products Petroleum and Natural Gas Regulatory Board
(Petroleum and Natural Gas Regulatory Board
Act, 2006)
Drugs and pharmaceuticals
Fertilisers Relevant Regulators
Sugar and industrial alcohol
3
The activity of electricity generation will be considered as “Manufacturing”. Transmission and Distribution activities
should be considered as the “Services” – Q 2.14 of FAQ-2 dated 8 July 2015

Category B: Unregulated Sector - 33 industries

1. Machinery and mechanical appliances used in defence, space and atomic energy sectors
excluding any ancillary item or items [Inclusions: Any company which is engaged in any
item or items supplied exclusively for use under this clause, shall be deemed to be covered
under these rules]
2. Turbo jets and turbo propellers;
3. Arms, ammunitions and explosives;
4. Propellant powders; prepared explosives (other than propellant powders); safety fuses;
detonating fuses; percussion or detonating caps; igniters; electric detonators;
5. Radar apparatus, radio navigational aid apparatus and radio remote control apparatus;
6. Tanks and other armored fighting vehicles, motorised, whether or not fitted with weapons
and parts of such vehicles, that are funded (investment made in the company) to the extent of
ninety per cent, or more by the Government or Government agencies;
7. Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring,
loading and unloading services rendered by for4 a Port in relation to a vessel or goods
regulated by the Tariff Authority for Major Ports under the Major Ports Trusts Act, 1963 (38
of 1963);
8. Aeronautical services of air traffic management, aircraft operations, ground safety services,
ground handling, cargo facilities and supplying fuel rendered by at the5 airports [Exclusions
- all airports and aircraft operations belonging to or subject to the control of the Armed
Forces or paramilitary Forces of the Union are excluded from the scope of these Rules.]
9. Iron and Steel;
10. Roads and other infrastructure projects (It covers Roads, national highways, state highways,
major district roads, other district roads and village roads, including toll roads, bridges,
highways, road transport providers and other road-related services. Hence, every activity
including construction and maintenance of the above projects are covered under the Rules.)
11. Rubber and allied products
12. Coffee and tea;
13. Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings,
mechanical (including electro mechanical) traffic signaling equipment of all kind;
14. Cement;
15. Ores and Mineral products;
16. Mineral fuels (other than Petroleum), mineral oils etc.
17. Base metals;
18. Inorganic chemicals, organic or inorganic compounds of precious metals, rare-earth metals
of radioactive elements or isotopes, and Organic Chemicals;
19. Jute and Jute Products;
20. Edible Oil;
21. Construction Industry (It covers Industrial, commercial and social development and
maintenance, real estate development, including an industrial park or special economic zone
– contractors as well as sub-contractors) (June 2019)
4
Substituted by the Companies (Cost Records and Audit) Amendment Rules, 2018
5
Substituted by the Companies (Cost Records and Audit) Amendment Rules, 2018

FYK 1 – The above category covers Industrial, commercial and social development
and maintenance, real estate development, including an industrial park or special
economic zone – contractors as well as sub-contractors. Would the construction and
sale of residential property like residential flat be covered in the rules?
The Technical cell6 (TC) of the Institute has clarified that this category covers
Industrial, commercial and social development and maintenance, real estate
development, including an industrial park or special economic zone. Hence,
construction and sale of Residential Flats, which has not been covered under the para
mentioned above, is not covered under the Rule 3.
FYK 2 - A private company is into the business of modification as well as construction

business of airport. Airport Authority of India has awarded contract to them titled
“Modification/ Expansion of existing Integrated Terminal Building”. Whether to group
it in Construction Industry or Roads & Other Infrastructure Projects?
The TC had clarified that the above category covers Development & Maintenance of
Commercial and Industrial projects. In the instant case, the project / contract is for
development of Commercial Project and hence it will be covered under Table B, Sr
No. 21 – Construction Industry. Nikkhil ₲upt@
22. Health services, namely functioning as or running hospitals, diagnostic centres, clinical
centres or test laboratories; [Exclusions – 1) companies running hospitals exclusively for its
own employees, provided if such hospitals are not providing health services to outsiders also
in addition to its own employees on chargeable basis and 2) companies engaged in running
of Beauty parlours / beauty treatment]
23. Education services, like imparting training or education by means of any mode. [Exclusions
– 1) auxiliary services provided by companies, as a separate independent entity, to
educational institutions viz., (i) transportation of students, faculty and staff; (ii) catering
service including any mid-day meals scheme; (iii) security or cleaning or house-keeping
services in such educational institution; (iv) services relating to admission to such institution
or conduct of examination; 2) services falling under philanthropy (charity) or as part of
social spend which do not form part of any business]
24. Milk powder;
25. Insecticides;
26. Plastics and polymers;
27. Tyres and tubes;
28. Pulp7 and Paper;
6
The Central Council of the ICAI has constituted the TC to provide the requisite guidance on the technical issues
related with the CAS and costing accounting practices in India.
7
Inserted by the Companies (Cost Records and Audit) Amendment Rules, 2018

29. Textiles;
30. Glass;
31. Other machinery;
32. Electricals or electronic machinery;
33. Production, import and supply or trading of medical devices, like Cardiac stents; Drug eluting
stents, heart valves, Catheters, Pacemakers and Intraocular lenses etc.
Exclusions – The Rule is not applicable to:
a) Foreign companies having only liaison offices in respect to product category (33) above
b) Micro enterprise or a small enterprise as per Micro, Small and Medium Enterprise
Development Act, 2006 (‘MSMED Act’).
FYK 3- What is Micro Enterprise and Small Enterprise as per the MSMED Act?
Monetary Threshold for applicability of Rule 3 on Table A as well as Table B products is that the
overall turnover of the Company (from all the products / services) during immediately preceding
financial year is Rs. 35 Crores or more.
FAQs issued by the Institute

Q: Is there any prescribed format for preparation of Cost records and cost audit report?
A: No, there are no prescribed format. The principles of maintenance of cost records have been
notified in the Rules in Form CRA-1 (Refer Appendix 1). The principles are in sync with the cost
accounting standards.
The cost audit report is required to be prepared in Form CRA-3 and it should be prepared on the
basis of verified cost data. The cost audit should be done in conformity with the “cost auditing
standards” as referred to in Section 148 of the Companies Act, 2013. In case the Cost Auditor desires
to point out any material deficiency or give a qualified report, he/she shall indicate the same against

the relevant para (i) to (vii) in the prescribed form of the Cost Audit Report giving details of
discrepancies he/she has come across.
Q: What is meaning of “Turnover” in relation to the Companies (Cost Records and Audit) Rules,
2014?
A: For the purposes of these Rules, “Turnover” includes
c) gross turnover (excluding duties and taxes) from the sale or supply of all products or services
during the financial year;
d) any turnover from job work or loan license operations;
e) export benefit received;
f) scrap sale; and
g) trading turnover (December 2015)
FYK 4 - Is there any Section 2(91) of the Companies Act,

difference between the 2013 defines the ‘Turnover’ as the
definition of “Turnover” as aggregate value of the realization of
per the Companies Act, amount made from the sale, supply or
2013 and as per these Rules? distribution of goods or on account of
services rendered
For Example: SHANHITA LTD., a manufacturing company, producing Industrial chemicals had
the following income during the year 2014-15: (Amount in Rs. Lakhs)
Sales: Manufactured products 43,750

Traded products 2,830
Income from job Works 780
Sale of Defectives 130
Export Incentives 85
Cash Discount Received 35
Note: Sales inclusive of GST 2,840
In the above case the turnover of the company as per the Companies (Cost Records and Audit) Rules,
2014 is as follows:-
Sales: Manufactured products 43,750
Traded products 2,830

Income from job works 780

Sale of Defectives 130
Exports incentives 85 47,575
Less: GST 2,840
Turnover 44,735
Q: A company does job work for others. The raw materials are supplied to the company by the
principal and the job worker gets conversion charges only. The Job Worker company pays the GST
which is reimbursed by the principal. Will the job worker be covered under the Companies (Cost
Records and Audit) Rules, 2014?
A: If the products of the Job Worker is listed under Table A or Table B of the Rules and the Job
Worker company meets the threshold limits as prescribed, then the job worker company will be
required to maintain cost accounting records. If the threshold criteria of the cost audit as prescribed
are met, the company would be covered under cost audit also. Payment of GST by the Job Worker
and in turn getting reimbursement for it is immaterial for application of the Rules.
Q: The manufacturing process of a company generates Metal Scrap during production of its main
products which may or may not be covered under cost audit. Such scrap is sold in the market after
the same is cleared under CTA Codes that are covered in the Rules. Will the company be covered
under cost audit for generation of scrap? Nikkhil ₲upt@
A: Generation of scrap is not a production or processing or manufacturing but is incidental to

manufacture of its main products. The Rules are applicable to production of goods or providing of
services. CTA Codes have been inducted in the Rules for proper identification of Products that are
manufactured. The act of payment of GST is immaterial in the context of application of the Rules.
The generation of scrap and its consequent sale in the market cannot be construed to be covered
under the Rules.
DIY 1
a) Maharaj Pvt Ltd. purchases a Raw Material (Steel Coil) and then do some Cutting or
Drawing work on it either by self or through a Job worker and then it is sold. CFO of the
Company considers it as a trading Sale. Accord your opinion on whether the Cost Records
/ Audit is applicable on this Sale if the turnover exceeds the prescribed limits.

b) Sanjeevani Booti City Hospital specialises in Test Tube Baby technology. Are they
covered under Rule 3? Presume that they fulfil the turnover criteria.
c) M/s Mahakal Enterprises Pvt Ltd manufactures and sells wooden furniture. Total turnover
of the Company during the FY 2018-19 was Rs. 50 crores. Whether the Company is
required to prepare its cost Records under Rule 3 of the Companies (Cost Records and
Audit) Rules, 2014?
d) In the above example, the Company suffered a sudden reduction in demand of the wooden
furniture in FY 2019-20 and its turnover dropped to Rs. 37 crores. Hence, the Company
introduced a new range of products made out of Jute. In FY 2019-20, the Company was
able to sell Jute products worth Rs. 2 Lakhs. Comment whether the Company is required
to prepare its cost Records under Rule 3 of the Companies (Cost Records and Audit) Rules,
2014? If yes, for which FY and product?

e) Trilok Private Limited has given the details of the products manufactured / traded by it
during the FY 2019-20. You are required to assess for which products the Company is
required to prepare its cost records, if at all, for the year 2020-21.
Particulars Sales (in INR)
Manufacture:
h) Cement 20 Lakhs
i) Insecticides 30 Lakhs
j) Garments / Hosiery 10 Crore
Trading:
k) Laptops and allied accessories 20 Crores
l) Calculators 3 Crores
m) Electrical Appliances 40 Lakhs
Job work Income 90 Lakhs
Total 34.90 Crores
Note: Apart from the above, the Company sold scrap from Garment and Hosiery division
for Rs. 12 Lakhs.
f) Dhara Oils Pvt Ltd is a leading manufacturer of edible Olive Oil in India. During the FY
2019-20, its turnover from sale of edible oil is INR 58 crores. The Company is registered
under the MSMED Act as a Small Enterprise. Analyse the applicability of Rule 3 on Dhara.

g) Gartner Ltd. provides Facility Management Services (FMS) at Commercial & Residential
premises. These include:
1. Housekeeping & Pantry Management
2. Security & Fire Safety
3. Facility Management Consulting
4. Pest Control
5. Landscaping & Horticulture
6. Façade Cleaning
7. Energy & Safety Audits
8. Mechanical, Electrical & Plumbing (MEP) Services
9. Society & Condominium Management
10. Office Support Services
The entire operational revenue of the Company (Rs. 60 cr.) is from Facility Management
Services. Will the activities of the Company be covered under Construction Activity as per
Rule 3?
Rule 4: Applicability of Cost Audit
Sub-rule 1: Every company specified in item (A) of rule 3 shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from all its products and
services during the immediately preceding financial year is rupees fifty crore or more and the
aggregate turnover of the individual product or products or service or services for which cost records
are required to be maintained under rule 3 is rupees twenty five crore or more.
Sub-rule 2: Every company specified in item (B) of rule 3 shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from all its products and
services during the immediately preceding financial year is rupees one hundred crore or more and
the aggregate turnover of the individual product or products or service or services for which cost
records are required to be maintained under rule 3 is rupees thirty five crore or more.

In a nutshell, monetary threshold for getting the cost records audited:

Category Monetary Threshold (during immediately preceding financial year)
of Rule 3
A Overall annual turnover of the Company (from all the Rs. 50 Crore or more
(Regulated products / services) and
Sector) Aggregate turnover of the individual product(s) / Rs. 25 Crore or more
service(s) for which cost records are prescribed under
Rule 3
B (Non- Overall annual turnover of the Company (from all the Rs. 100 Crore or
regulated products / services) and more
Sector) Aggregate turnover of the individual product(s) / Rs. 35 Crore or more
service(s) for which cost records are prescribed under
Rule 3
Sub-rule 3: Exclusions to Cost Audit - The requirement for cost audit under these rules SHALL
NOT apply to a company which is covered in rule 3, and
a) whose revenue from exports (in foreign exchange) of the products covered in Table A and
B exceeds 75% of its total revenue; or
DIY 2 - How to determine the percentage to total revenue in the following case:
In a company who is manufacturing Pharmaceutical products, the revenue from export of
pharmaceutical products earned in foreign exchange divided by total revenue including
other income etc. is 58%. In other words,
Revenue from export of pharmaceutical products ÷ Total Revenue = 58%
The revenue in foreign exchange earned from export of pharmaceutical products plus
revenue in foreign exchange earned from rendering of research & development service
divided by total revenue including other income etc.is 82%.
(Revenue from export of pharmaceutical products + Revenue form R&D activities) ÷
Total Revenue = 82%

b) which is operating from a Special Economic Zone8; or

c) which is engaged in generation of electricity for captive consumption through captive
generating plant
DIY 3 - Examine whether cost records and cost audit is applicable in the following situations:
Case Turnover (Rs. Crores) Applicability of
Table A Table B Table A + Other Total Cost Cost
Products Products B Products Products Revenue Records Audit
(A) (B) (C=A+B) D (E=C+D) A B
I 5 10 15 19 34
II 5 10 15 25 40
III 10 15 25 26 51
IV 0 25 25 26 51
V 20 14 34 75 109
VI 20 20 40 61 101
DIY 4 - A Company importing product A, B & C (Covered under Table B of Rule 3) and
carrying labeling and relabeling activities (Manufacturing activity).
Manufacturing Turnover:-
Product name CTA Heading Turnover (Cr.)
Product A 2905 5
Product B 2906 2
Product C 3823 3
Total Manufacturing Turnover(A) 10
Selling of Imported Products A, B & C as it is without Packing Repacking (Trading Activity)

Trading Turnover:-
Product name CTA Heading Turnover (Cr.)
Product A 2905 8
Product B 2906 10
Product C 3823 30
Product D 3823 20
Product F 2906 40
Total Trading Turnover (B) 108
Total Turnover of the company (A + B) = Rs. 118 Crs.
Kindly let us know whether Cost Audit (Rule 4) is applicable considering the above.
8
A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the
country. Companies may be offered tax holidays, trading quotas, ease in custom and labour regulations etc.

If a company meets the eligibility criteria (of Cost records and / or cost
audit) in one year and if in the subsequent year’s its turnover drops below
the specified limits, Rules shall be applicable for all the subsequent years.9
Q: Whether maintenance of Cost Accounting records and Cost Audit thereof, is applicable to
products which are for 100% captive consumption10? (June 2015 & 2017)
A: In case a product is manufactured and 100% captively consumed for production of some other
product which is also covered under these Rules and is subject to cost audit, then the cost of such
captively consumed product would form part of the final product which is also under cost audit and
as such a separate cost audit report for the captively consumed product will not be necessary.
However, if the product is partly for captive consumption and partly sold, or if the product is 100%
captively consumed for production of some other product which is not covered under these Rules,
then cost audit would be applicable for such captively consumed product(s). Nikkhil ₲upt@
Captively consumed (CC)

goods
100% Captive consumption 100% Captive consuption

Part captive consuption
+ +
+
Final goods covered under Final goods not covered
Part sold
Cost Audit under Cost Audit
No separate Cost Audit for Separate Cost Audit for CC Separate Cost Audit for CC
CC Goods Goods Goods
9
Clarified by the Institute of Cost Accountants of India [Q 1.10 of FAQ-1 dated 19 March 2015]
10
Captive Consumption means the consumption of goods manufactured within the same factory or transfer of goods
to a sister unit or another factory of the same company/firm for further use in the manufacture of goods.

Rule 5: Maintenance of Records
Cost records shall be maintained on a regular basis (monthly or quarterly or half-yearly or

annually) in such manner so as to facilitate calculation of:
a) per unit cost of production or cost operations;
b) cost of sales; and
c) margin for each of its product or services Refer Annexures
for specimen of
Form CRA 1 to 4
Following forms may be used:
Form CRA 1 – Particulars of item of cost to be included in the books of accounts
Form CRA 2, XBRL format – Appointment of cost auditor (Single CRA 2 is to be filled for all the
products and for all the auditors, if more than one auditor is appointed)
Form CRA 3 – Form of Cost Audit Report
Form CRA 4, XBRL format – Form for submission of Cost Audit Report to CG (alongwith
management’s comments on reservations / qualification)
Annexures to the cost audit report (i.e. Form CRA 3)

PART A (FOR BOTH MANUFACTURING AND SERVICE SECTOR)
Para Content
1 General Information (about the Company) like Name, address, CIN etc.
2 General details of Cost Auditor like Firm’s name, registration number, address,
membership number, etc.
3 Cost accounting policy on material cost, depreciation, inventory valuation etc. 11
4 Product or service details produced/provided by the Company (including the net
revenue from operations of current year as well the previous year)
PART B (FOR MANUFACTURING SECTOR)

Para Content
1 Quantitative details (for each product separately) like available capacity, installed
capacity etc. in no. of units (details to be furnished for the current year as well as
the previous year)
2 Abridged cost statement (for each product12 separately). Amounts13 to be
disclosed in total as well as the per unit value (all details to be furnished for the
current year as well as the previous year)
2A Details of material consumed for the current year as well as the previous year
2B Details of Utilities for the current year as well as the previous year
11
The auditor should specify the changes, if any, made in the cost accounting policy for the product(s)/service(s) under
audit during the current financial year as compared to the previous financial year.
12
In case the same product has different unit of measure, separate cost statement shall be provided for different unit
of measures.
13
In case the company follows a pre-determined or standard costing system, the above cost statement should reflect
figures at actuals after adjustment of variances, if any

2C Details of Industry Specific Operating Expenses for the current year as well as the
previous year Nikkhil ₲upt@
PART C (FOR SERVICE SECTOR)

Para Content
1 Quantitative Information (for each service separately) like available capacity,
installed capacity etc. in the applicable unit of measurement (UOM 14) (details to
be furnished for the current year as well as the previous year)
2 Abridged cost statement (for each service separately). Amounts to be disclosed in
total as well as the per unit value (all details to be furnished for the current year
as well as the previous year)
2A Details of material consumed for the current year as well as the previous year
2B Details of Utilities for the current year as well as the previous year
2C Details of Industry Specific Operating Expenses for the current year as well as the
previous year
PART D (FOR BOTH MANUFACTURING AND SERVICE SECTOR)

Para Content
1 Product and service profitability statement (for audited products/services) for the
current year as well as the previous year
2 Profit reconciliation (for the company as a whole 15) for the current year as well as
the previous year
3 Value addition and distribution of earnings (for the company as a whole 5) for the
current year as well as the previous year
4 Financial position and ratio analysis (for the company as a whole) like profitability
ratios, working capital ratios etc.
5 Related party transactions (for the company as a whole). This includes disclosure
of the “transfer price” as well as the “normal price” (refer note 4 below)
separately for each related party transaction. Nikkhil ₲upt@
6 Reconciliation of indirect taxes (for the Company as a whole)
Some important points to be noted regarding the above-mentioned annexures

1) The annexures are to be signed by the company secretary and any one director of the company
apart from the cost auditor.
2) Wherever, there is any significant variation in the current year's figure over the previous
year's figure for any item, reasons thereof shall be given by the Cost Auditor. (June 2019)
14
The Unit of Measurement (UOM) for each Customs Tariff Act Heading, wherever applicable, shall be the same as
provided for in the Customs Tariff Act, 1975 (51 of 1975) corresponding to that particular Customs Tariff Act Heading.
15
Although Rule 3 prescribed for preparation of cost records for specified products only, however, this bracket implicitly
indicates the preparation of cost records for the Company as a whole.

3) Wherever, duration of the current year or the previous year is not 12 (twelve) months, same
shall be clearly indicated in the Report.16
4) As per item 24 of CRA 1, normal price means price charged for comparable and similar
products in the ordinary course of trade and commerce where the price charged in the sole
consideration of sale and such sale is not made to a related party. Normal price can be
construed to be a price at which two unrelated and non-desperate parties would agree to a
transaction and where such transaction is not clouded due to the proximity of the parties to
the transaction and free from influence though the parties may have shared interest. The basis
adopted to determine normal price shall be classified as under:
(i) Comparable uncontrolled price method
(ii) Resale price method
(iii) Cost plus method
(iv) Profit split method
(v) Transactional net margin method
(vi) Any other method, to be specified. (Definition of Normal Price - December 2018)
Applicable fees17 to be filed while filing Form CRA 2 and CRA 4 with MoCA
Nominal Share Capital (in INR) Fee applicable
Less than 1,00,000 (including companies having no
share capital) Rs 200 per document
1,00,000 to 4,99,999 Rs 300 per document
1,00,00,000 or more Rs 600 per document
In case of delay in filing Form CRA 2 and CRA 4 with MoCA

Period of delays All forms
Up to 30 days 2 times of normal fees
More than 30 days and up to 60 days 4 times of normal fees
More than 180 days 12 times of normal fees

Q: Whether separate Form CRA-2 is required to be filed by a company having two or more different
types of products covered under cost audit?
A: A single Form CRA-2 is required to be filed providing details of the sectors/industries covered
under cost audit and details of cost auditor. For Companies appointing multiple cost auditors, only
16
This situation may arise where the company has been incorporated in the middle of the year or it has been
discontinued before the end of the financial year. This can also happen in case of business restructuring like merger,
amalgamation, spin off, de-merger etc. during a financial year.
17
as per the Companies (Registration of offices and Fees) Rules, 2014

one single Form CRA-2 is required to be filed. Provision has been made in the Form to
accommodate details of multiple cost auditors.
Rule 6: Cost Audit (including procedure of appointment of a cost auditor)
Sub-rule 1 - The companies satisfying the thresholds limits laid down in Rule 4, must
(through Board of Directors / Audit committee) appoint a cost auditor within 180
DAYS OF COMMENCEMENT OF THE FINANCIAL YEAR
Sub-rule 1A - The cost auditor must give his written consent to the appointment
alongwith the following 4 certificates to the Company:-
a) It is not disqualified for appointment as auditor under the Cost and Works
Accountants Act, 1959 and the Rules made therein
b) It satisfies the criteria provided in section 141 of the Companies Act, 2013
c) The proposed appointment is within the limits laid down under the authority of
the Companies Act, 2013
d) The list of pending proceedings against the cost auditor or the audit firm, with
respect to professional conduct, is complete and accurate
Sub-rule 2 - The Company must inform the cost auditor about his appointment and file
a notice of such appointment with the CG (in form CRA-2, XBRL format) within 30
days of the Board meeting (in which appointment has been done) or 180 days of the
commencement of financial year whichever is earlier
Sub-rule 3 - Every cost auditor appointed as such shall continue in such capacity till
the expiry of one hundred and eighty days from the closure of the financial year or till,
he submits the cost audit report, for the financial year for which he has been appointed.
Provided that the cost auditor appointed under these rules may be removed from his
office before the expiry of his term, through a board resolution after giving a
reasonable opportunity of being heard to the Cost Auditor and recording the reasons
for such removal in writing

Sub-rule 3A - Any casual vacancy18 in the office of the cost auditor, shall be filled by
the Board of Directors within 30 days of occurrence of such vacancy and the company
shall inform the CG in Form CRA-2, XBRL format (to be submitted alongwith the
board resolution) within 30 days of such appointment of the cost auditor.
Sub-rule 3B - The cost statements, including other statements to be annexed to the cost
audit report, shall be approved by the Board of Directors before they are signed on
behalf of the Board by any of the director authorised by the Board, for submission to
the cost auditor to report thereon
Sub-rule 4 - Every cost auditor, who conducts an audit of the cost records of a
company, shall submit the cost audit report along with his or its reservations or
qualifications or observations or suggestions, if any, in form CRA 3.
Sub-rule 5 - Every cost auditor shall forward his duly signed report to the Board of
Directors of the company within a period of one hundred and eighty days from the
closure of the financial year to which the report relates and the Board of Directors
shall consider and examine such report, particularly any reservation or qualification
contained therein.
Sub-rule 6 - The Company, within 30 days from receipt of the auditor’s report,
shall file a report to the CG (in form CRA-4, XBRL format) containing full
information and explanation on every reservation or qualification in the cost audit
report
Provided that the Companies which have got extension of time of holding Annual
General Meeting under section 96 (1) of the Companies Act, 2013, may file form CRA-
4 within resultant extended period of filing financial statements under section 137 of
the Companies Act, 2013.19
18
Casual vacancy may occur due to the resignation or death or removal of the cost auditor before its stipulated term.
In case of casual vacancy due to removal of the cost auditor before the expiry of his term, a reasonable opportunity of
being heard should be given to the cost auditor. Further the reasons of his for such removal should be recorded in
writing.
19
Proviso inserted by the Companies (Cost Records and Audit) Amendment Rules, 2018

Sub-rule 7 - The provisions of sub-section (12) of section 143 20 of the Act and the
relevant rules made thereunder shall apply mutatis mutandis21 to a cost auditor during
performance of his functions under section 148 of the Act and these rules.
(December 2016)
DIY 5: Rajvik Automobiles Ltd has to get the cost audit conducted for FY 2019-20. For the
aforesaid audit, the company proposes to appoint M/s R.K. Associates (Cost Accountants). Guide
the Company about the due dates of appointment of the cost auditor and filing of relevant forms
under the following two situations:
A) In the board meeting held on 17 April 2019, a resolution was passed to appoint the cost
auditor
B) In the board meeting held on 17 September 2019, a resolution was passed to appoint the
cost auditor
Section 148 of the Companies Act, 2013 (Part III)

(6) A company shall within thirty days from the date of receipt of a copy of the cost audit report
prepared in pursuance of a direction under sub-section (2) furnish the Central Government with
such report along with full information and explanation on every reservation or qualification
contained therein.
(7) If, after considering the cost audit report referred to under this section and the information and
explanation furnished by the company under sub-section (6), 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.
20
As per section 143(12) of the Companies Act 2013, it is obligatory on the part of auditor to report offence of fraud
which is being or has been committed in the company, to the Central Government as per the prescribed procedure
under the Rules. This section is also applicable to the cost auditor. The procedure of reporting fraud to the CG has been
discussed in the theory questions given at the end of this chapter
21
Mutatis mutandis is a latin phrase which means same principle may be applied after making the required situational
changes

Whether a Company can appoint more than 1 cost auditors 22
No. of products No. of Auditors Remarks

under cost audit
Single Product Single / Multiple - Consolidated Report
auditors at the option - Signed by all cost auditors
of Company - One principal / lead auditor to be appointed who
will be responsible for consolidation and filing
of cost audit report with the BOD
Multiple Products Single / Multiple - Consolidated audit report
auditors at the option - One principal / lead auditor to be appointed who
of Company will be responsible for consolidation and filing
of cost audit report with the BOD. Nikkhil ₲upt@
Waste Multipliers - The process-wise Cost/kg of output is being worked out for the textile industry.
Then these Costs are aggregated to arrive at the total yarn cost. As there are wastes at each process,
the final aggregation of process to arrive at the finished yarn has to take into Account all such process
wise wastages. This is done by using a factor known as a Waste Multiplier. Accordingly, waste
multiplier is that quantity of output from any process which will be needed to get one unit of final
output. (June 2013)
Illustration 1: The following details of the process-wise input and output are taken from the Cost
Accounting Records of SUNNY COTTON MILLS LTD., a yarn manufacturing Company, for the
year ended March 31, 2013:
Process Input / Output Kgs.

Blowroom Cotton processed 46,72,560
Laps produced 42,58,270
Carding Laps processed 42,74,360
Slivers produced 39,76,400
Draw Frames Slivers processed 39,48,240
Slivers drawn 39,01,800
Roving (Simplex) Drawn Slivers processed 38,74,120
Transferred to Ring Frames 38,31,500
Ring Frames (spinning) Slivers used 39,11,640
Finished Yarn produced 36,41,740
Reeling and Winding Yarn wound 36,35,400
Salable Yarn produced 35,80,880
Required: Calculate the process-wise Waste Multiplier factors for the year ended March 31, 2013.
(June 2013, 2014 & 2018)
22
Clarified by the Institute of Cost Accountants of India [Q 2.13 of FAQ-2 dated 8 July 2015]

Illustration 1A: The following are the process-wise input and output in a Textile Mill:
Department Input (kg) Output (kg)
Blow Room 41,10,169 38,27,662
Carding 38,42,123 35,74,310
Draw Frames 35,48,981 35,07,245
Roving (Simplex) 34,82,360 34,44,054
Ring Frame 35,16,085 32,73,475
Required: Find the cotton input per 1000 kg of Ring Frame yarn output if initially the cotton under
weight of 0.3% moisture loss from the invoice weight. (December 2019)
Capital Employed [to be disclosed in para 4 of Part D of the Annexures to the Cost Audit
Report]
Capital employed means the capital which has been infused and is being utilized for the purpose of
business. In other words, it is the total amount of capital used for the acquisition of profits by a firm
or project. It is the value of all the assets employed in a business or business unit, and can be
calculated by adding fixed assets to working capital; or by subtracting current liabilities from total
assets.
“Capital Employed” includes funds coming from both the owners and lenders, i.e., it covers both
equity and debt. It is computed as an average of
- Net fixed assets;
- Non-current investments23; and
- Net current assets24
existing at the beginning and close of the financial year. Hence, capital employed is computed as an
average of opening and closing balances of the given financial year.
Capital Employed excludes the following:-
1) Capital Work In progress

2) Effect of revaluation on fixed assets
3) Current Investments
4) Investments in other companies (including subsidiaries)
5) Investments in buildings, etc. not used for business
6) Preliminary expenses
7) Debit balance of Profit and Loss Account. Nikkhil ₲upt@
23
Non-current investments are assumed to be part and parcel of the business, owing to the fact that the businessman
has chosen investing outside the business over a longer period of time. Eg. Deposit given to the electricity board is a
non-current investment outside the business but is essential for the running of the business.
24
Net current assets = Current Assets – Current Liabilities (excluding interest-bearing loans)

Illustration 2: The following is the abridged Balance Sheet of BEEKAY Ltd.:
(Rupees in lakhs)
Particulars 31.3.2010 31.3.2009
Liabilities
Share Capital 300 300
Debenture Redemption Reserve 30 35
Capital Subsidy from State Government 40 40
Revaluation Reserve 125 140
General Reserve 150 110
Balance in Profit & Loss A/c 63 50
Secured Loans 292 300
Unsecured Loans 110 114
1,110 1,089
Assets
Gross Block 740 690
Accumulated Depreciation (320) (300)
420 390
Capital Work–in–Progress 45 35
Investments 15 17
Current Assets
Inventories 420 430
Sundry Debtors 180 200
Advances for Capital Equipment 25 20
Other Loans & Advances 140 135
Cash & Bank Balances 20 22
Current Liabilities
Sundry Creditors for Others (180) (190)
Provision for Taxes (65) (70)
Miscellaneous Expenses 90 100
Total 1,110 1,089
Note: Term Loan due for repayment within 12 months are Rs.90 lakh (previous
year Rs.85 lakh).
Calculate the following for the company as a whole:

a) Capital Employed for the year ended 31.3.2010 and in which Annexure No. it
is to be filled up.
b) Net worth as on 31.3.2009 and 31.3.2010.
(December 2010; Similar question in December 2014)
Illustration 3: The following are extracted from the Annual report of Eastern Industries Ltd.:
(Rs. In
Lakhs)
Particulars 31 March 2006 31 March 2005
Share Capital 2,400 2,400
Reserves and Surplus:
General Reserve 21,000 22,200
Debenture Redemption Reserve 11,300 5,700
Revaluation reserve 6,200 7,400
Profit and loss account 200 38,700 2,200 37,500
Secured Loans:
Debentures 48,000 22,000
Term Loans 5,300 14,100
Cash credit 7,800 61,100 7,150 43,250
Unsecured Loans:
Fixed Deposits 2,000 2,250
Interest free sales tax loan 9,000 11,000 7,250 9,500
Total 1,13,200 92,650
Net Block 86,650 72,350

Capital Work in Progress 8,250 1,800
Investments 5,050 5,600
Current Assets, loans and advances 24,900 21,850
Less: Current Liabilities and provision (11,800) 13,100 (9,050) 12,800
Miscellaneous expenditure 150 100
Total 1,13,200 92,650
Notes:
1) Debentures are redeemable as follows:
- Rs. 120 crores at the end of 5th, 6th and 7th years in equal installments. The earliest date
of redemption is 30 September 2006.
- Rs. 100 crores in five semi-annual installments from 30 June 2006.
- Rs. 260 crores in five semi-annual installments of Rs. 40 crores and one final
installment of Rs. 60 crores commencing from 30 June 2010.
2) Term loans and fixed deposits payable before 31 March 2007 – Rs. 1,150 lakhs (previous
year – Rs. 4,050 lakhs).

3) Rs. 3,000 lakhs of interest free sales tax loan is repayable on 30 November 2006.
You required to calculate the capital employed as defined in the Annexure to the Cost Audit
Report.
(December 2006)
Illustration 4: The following details are extracted from the accounts of Super Chemicals Ltd., which
manufactures only one product in a single location:
(Rs. in lakhs)
31.3.2008 31.3.2007 31.3.2006
Gross Fixed Assets 13,845 12,636 11,535
Cumulative Depreciation 3,936 3,789 3,672
Value of trade marks included under fixed assets
(net of depreciation) 240 360 480
Capital Work–in–Process 819 675 951
Investments in Shares & Debentures 2,172 2,136 2,079
Inventories 1,875 1,740 1,533
Sundry Debtors 1,002 951 876
Advances for purchase of capital equipment 72 183 141
Other Loans & Advances 195 174 159
Other Current Assets 96 87 78
Sundry Creditors 642 561 522
Term loans due for repayment within 12 months 100 120 80
Provision for Expenses 87 102 84
Net Sales 11,772 9,636 8,793
Interest 1,842 1,491 1,248
Depreciation 162 141 132
Profit before taxes 696 435 591
Compute the following ratios as required in Part D of the Annexure 4 to the Cost Audit Report for
the year 2007–2008 and 2006–2007:
(i) PBT as a percentage of capital employed.

PBT as a percentage of Sales.
(ii)
(December 2008)
Net Worth [to be disclosed in para 4 of Part D of the Annexures to the Cost Audit Report]
Net Worth of the company is the Book value or Shareholders Equity of the firm. In the business
context, net worth is also known as book value or shareholders' equity. In fact, the balance sheet is
also known as a net worth statement.
“Net worth” means the aggregate value of

- the paid-up share capital;

- all reserves created out of the profits (except for revaluation reserve);
- securities premium account
- Forfeited share
- Surplus as per Profit and Loss Account, if any
Following shall be deducted from Net worth

- accumulated losses / debit balance of profit and loss account,
- deferred expenditure and miscellaneous expenditure not written off,
- write-back of depreciation on amalgamation.
Net Worth = Share Capital + Reserve & Surplus – Revaluation reserve– Accumulated losses, if any.
Statement showing changes in Net Worth

Any changes in the computation of net worth during the year should be analysed with reasons and
reported as follows:
Opening net worth x

Add: (1) Increase in share capital x
(2) Increase in reserves x x
Less: (1) Decrease in share capital x
(2) Decrease in reserves x x
Closing net worth x
Net Sales / Net Revenue from operations [to be disclosed in para 4 of Part D of the Annexures
to the Cost Audit Report]
Net Sales of a Company represents the gross sales of the products / services in a particular financial
year. It excludes the following:
1) Sales return
2) Indirect taxes like GST
3) Octroi / other local taxes
4) Proceeds from sale of scrap / waste
5) Packing / transportation charges (recoverable from the customers)
6) Any other income of abnormal / non-recurring nature
Profit before tax / Profit [to be disclosed in para 4 of Part D of the Annexures to the Cost
Audit Report]
Profit before tax (PBT) is a measure that looks at a company's profits before the company has to pay
corporate income tax. It deducts all expenses from revenue including interest expenses and operating
expenses except for income tax. PBT may be computed as follows:
Direct Method Indirect method

Particulars Amount Particulars Amount

Revenues XXXX PAT XXXX
Less: All expenses XXXX Add: Income tax XXXX
except for income tax PBT XXXX
PBT XXXX
Note: PBT shall not include “Other Comprehensive Income” 25
Operating Profit
Profit from business operations (Operating revenue minus operating expenses) before deduction of
interest and taxes. Any non-operational / financial income / expense must be excluded. Operating
profit may be computed as under:
Direct Method Indirect method
Particulars Amount Particulars Amount

Operating Revenues XXXX PBT XXXX
Less: Operating XXXX Add: Interest XXXX
expenses (except for Operating Profit XXXX
interest and) income tax
Operating Profit XXXX
Value Added [to be disclosed in para 3 & 4 of Part D of the Annexures to the Cost Audit
Report]
Value added is the amount by which the value of an article is increased at each stage of its
production, exclusive of initial costs. It is the difference between the price of product or service and
the cost of producing it.
The term “Value Addition” has been defined under the Companies (Cost Records and Audit) Rules,
2014 as the difference between net output value (net sales) and cost of bought out materials and
services for the product under reference. It may be computed as follows:
Particulars Amount (Rs.)

Revenue from Operations (excluding sales XXXX
returns)
Less: Taxes and other duties (like GST etc.) XXXX
Net Revenue from Operations XXXX
Add: Export Incentives, if any XXXX
Add/ Less: Adjustment of stocks XXXX
25
Other comprehensive income includes those revenues, expenses, gains and losses which have not yet been
realized. They are excluded from net income and are listed after net income in the income statement.

Less: Cost of bought out inputs (refer Note)

(a) Cost of Materials Consumed XXXX
(b) Process Materials / Chemicals XXXX
(c) Consumption of Stores and Spares XXXX
(d) Utilities (e.g. power and fuel) XXXX
(e) Others, if any XXXX
Total Cost of bought out inputs XXXX
Value Added XXXX
Note: Cost of bought out inputs should include all the expenses excluding the following:
- Rates and taxes
- Depreciation
- Salaries and Wages
- Interest
Statement showing distribution of earnings to different claimants thereto

Particulars Amount
Value Added XXXX
Add: Income from any other source XXXX
Add: Exceptional and Extra-ordinary Income XXXX
Add: Other Comprehensive Income, if any XXXX
Earnings available for distribution XXXX
Distribution of earnings to:
1. Employees as salaries and wages, retirement benefits, etc. XXXX
2. Shareholders as dividend XXXX
3. Government as taxes (specify) XXXX
4. Extra Ordinary Expenses XXXX
5. Others, if any (specify) XXXX
6. Company as retained funds (balancing figure) XXXX
Total distribution of earnings XXXX
Illustration 5: From the following figures extracted from the Cost Accounting Records of a
company, calculate the Value Addition and its ratio as percentage of sale and also show how the
value added is distributed to the different claimant thereto:
Particulars Amount (Rs. In Lakhs)

Gross Sale (included ED Rs.1,240 lakhs) 16,500
Raw materials 6,250
Increase in value of stock of finished goods 42
Salaries and wages 2,800
Power and fuels 2,220
Other overheads (Excluding Depreciation) 215
Depreciation 900

Interest 760
Dividend income from Investment 75
Provision for taxation 220
Dividend proposed 300
(June 2009)
Illustration 6: The following figures are extracted from the statement prepared by the cost
Accountant and the Trial Balance of ABC Ltd., Which is a single product company:
Year ending
31.3.09 31.3.08 31.3.07
(Rs. in lakhs)
Gross sales inclusive of GST 2,040 1,985 1,875
GST 295 280 265
Raw materials consumed 1,140 1,060 975
Direct wages 35 32 27
Power and fuel 30 27 24
Stores and spares 6 5 4
Deprn. charged to production cost centres 16 15 13
Factory overheads–
Salaries and wages 5 4 3
Depreciation 2 2 2
Rates and Taxes 1 1 1
Other overheads 6 5 4
Administrative overheads–
Rates and Taxes 2 2 2
Selling and Distribution overheads –
Packing and Forwarding 6 6 5
Depreciation 1 1 1
Interest 85 74 68
Bonus and Gratuity 12 10 9
Gross current Assets 840 724 640
Current liabilities and Provisions 324 305 246
You are required to compute the following ratios as per Companies (Cost Records and Audit)
Rules, 2014 –
(i) Operating Profit as percentage of value addition

(ii) Value Additions as percentage of Net Sales

Note: The Computation should be based on EBDIT as Profit. NİkḱҺil Güptȧ

(June 2008, June 2011, June 2010 and December 2013)
Treatment of interest on working capital loan while calculating Value added

A working capital loan is a loan that is taken to finance a company's everyday operations. These
loans are not used to buy long-term assets or investments and are, instead, used to provide the
working capital that covers a company's short-term operational needs. The usual duration of working
capital loan in India is from 6 to 12 months. Those needs can include costs such as payroll, rent and
debt payments. In this way, working capital loans are simply corporate debt borrowings that are used
by a company to finance its daily operations.
The immediate benefit of a working capital loan is that it's easy to obtain and lets business owners
efficiently cover any gaps in working capital expenditures. The other noticeable benefit is that it is a
form of debt financing and does not require an equity transaction, meaning that a business owner
maintains full control of their company, even if the financing need is dire.
Interest on working capital funds is to be deducted while computing the value added as against
interest on long term debts which is not to be deducted. The reason for such a treatment is that the
interest of working capital loan is a production necessity. It is not rational for the owner to infuse
equity share capital for the temporary day-to-day cash needs.
Illustration 7: The following figures are extracted from the Cost Accounting records of ADRIJA
LTD., a single product manufacturing company:
Year ended 31st March 2013 2012

(Amount in Rs.
lakhs)
Gross Sales (including GST) 2,600 2,080
GST 200 160
Other Income 150 100
Increase in Value of stock of Finished Goods 10 5
Raw materials Consumed 880 720
Direct wages, Salaries, Bonus, Gratuity etc. 220 176
Power & Fuel 120 96
Stores and Spares 80 70
Cess and local Taxes 60 50
Other manufacturing Overheads 215 185
Administrative Overheads:
Audit fees 18 15
Salaries & Commission to Directors 24 20
Other Overheads 130 110

Year ended 31st March 2013 2012

Selling and Distribution Overheads:
Salaries & Wages 18 15
Packing and forwarding 10 8
Other overheads 125 100
Total Depreciation 60 60
Interest Charges:
On Working Capital Loans from Bank 30 25
On Fixed Loans from IDBI 45 35
On Debentures 15 15
Provision for Taxes 158 100
Proposed Dividends 210 115
You are required to calculate the following ratios as stipulated PART-D, PARA-4 of the Annexure
to Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for the year ended
March 31, 2013 and 2012:
(i) Value Addition
(ii) Earnings available for Distribution
(iii) Distribution of Earnings to the different claimants.
(December 2013, Similar December 2015, 2016 & Similar June 2019)
Some miscellaneous ratios [similar ratios to be disclosed in para 3 & 4 of Part D of the
Annexures to the Cost Audit Report]
PROFITABILITY RATIOS
1) Return on capital employed / Return on Investment- Return on capital employed (ROCE)
/ Return on Investment (ROI) is a financial ratio that measures a company's profitability and
the efficiency with which its capital (both equity and debt) is used. In other words, the ratio
measures how well a company is generating profits from its capital (own as well as
borrowed). The ROCE ratio is considered an important profitability ratio and is used often
by investors when screening for suitable investment candidates. It can be computed as
follows:
ROCE = Earnings before interest and after tax / Average Capital Employed
2) Return on Equity / Return on Net Worth - Return on equity (ROE) / Return on Net Worth
(RONW) is a measure of profitability that calculates how much profit a company generates
with each rupee of shareholders' equity. Return on Net worth is a ratio developed from the
perspective of the investor and not the company. By looking at this, the investor sees if entire
net profit was passed on to him, how much return would he be getting. It explains the
efficiency of the shareholders’ capital to generate profit. Following formula may be used:

RONW = Profit after tax / Net Worth or Shareholder’s Funds
3) Profit Ratios – These ratios show a relationship between various types of profits with the
Net Sales of the Company. Following formulae may be used:
Gross Profit Ratio = Gross Profit/Net Sales X 100
Operating Profit ratio = Operating Profit/Net Sales X 100
Net Profit Ratio = Net Profit/Net Sales X 100
SOLVENCY / LIQUIDITY RATIOS (SHORT TERM)
4) Current Ratio - The current ratio is a liquidity ratio that measures a company's ability to pay
short-term obligations or those due within one year. Following formula may be used:
Current Ratio = Current Assets/Current Liabilities
SOLVENCY RATIOS (LONG TERM)

5) Debt-Equity Ratio - It measures the extent of equity covering the debt. This ratio is
calculated to measure the relative proportions of outsiders’ funds and shareholders’ funds
invested in the company. This ratio is determined to ascertain the soundness of long term
financial policies of that company and is also known as external-internal equity ratio.
Following formula may be used:
Debt Equity Ratio = Total Long Term Debts / Shareholders Fund
6) Proprietary Ratio - A variant of debt to equity ratio is the proprietary ratio which shows the
relationship between shareholders’ funds and total tangible assets.
Proprietary Ratio = Shareholder’s Fund / Total Assets
TURNOVER RATIO
7) Total Assets Turnover Ratio - This ratio compares the net sales by the value of total assets.
A high ratio is an indicator of over-trading of total assets while a low ratio reveals idle
capacity. The traditional standard for the ratio is two times. Following formula may be used:
Assets Turnover Ratio = Net Sales (excluding indirect taxes) / Total Fixed Assets
8) Stock Turnover Ratio - It denotes the speed at which the inventory will be converted into
sales, thereby contributing for the profits of the concern. When all other factors remain
constant, greater the turnover of inventory more will be efficiency of its management. This

ratio reveals the number of times finished stock is turned over during a given accounting
period. Higher the ratio, the better it is because it shows that finished stock is rapidly turned-
over. Following formula may be used:
Stock / Inventory Ratio = Net Sales (excluding indirect taxes)/ Average Stock or Inventory
9) Receivable (or Debtors) Turnover Ratio - It indicates the number of times on the average
the receivable is turn over in each year. The higher the value of ratio, the more is the efficient
management of debtors. It measures the accounts receivables (trade debtors and bills
receivables) in terms of number of days of credit sales during a particular period. Following
formula may be used:
Debtors’ Turnover Ratio [in term of no. of days’ sales] = Average Receivables x No. of days
in the year / Credit Sales (including indirect taxes)
Illustration 8: The Balance Sheet of X Ltd. stood as follows as on:
Liabilities 31 March 31 March Assets 31 March 31 March

2018 2017 2018 2017
Capital 1,500 1,500 Fixed Assets 2,400 1,800
Reserves 696 600 Less: Depreciation 840 600
Loans 600 720 Net Fixed Assets 1,560 1,200
Creditors & Others Investment 240 180
Current Liabilities 774 150 Stock 720 600
Debtors 420 300
Cash & Bank 120 120
Other Current assets 150 150
Miscellaneous 360 420
Expenditure
3,570 2,970 3,570 2,970
You are given the following information for the year 2017-18:
(Rupees in Lakhs)
Sales 3,600
Profit before Interest & Tax 900
Interest 144
Provision for Tax 360
Proposed Dividend 300
Required: Calculate for the year 2017-18:

A. Return on Capital Employed

B. Stock Turnover Ratio
C. Return on Net Worth
D. Current Ratio
E. Proprietary Ratio
Illustration 9: M Ltd has the following Balance Sheets as on 31 March 2018 and 31 March 2017:
Particulars Rs. in lakhs

31 March 2018 31 March
2017
Sources of Funds:
Shareholder’s Fund 4,954 3,144
Loan Funds 7,740 6,766
12,694 9,910
Applications of Funds:
Fixed Assets 7,132 6,000
Cash & Bank 1,178 1,140
Debtors 3,190 2,536
Stock 5,934 5,014
Other Current Assets 3,334 3,008
Less: Current Liabilities (8,074) (7,788)
12,694 9,910
The Income Statement of the M Ltd for the year that ended is as follows:
Particulars Rs. in lakhs

31 March 2018 31 March
2017
Sales 44,530 27,964
Less: COGS 41,920 25,288
GP 2,610 2,676
Less: Selling, General & Administrative Expenses 2,070 1,304
Earnings before Interest and Tax (EBIT) 540 1,372
Less: Interest Expense 226 210
Profit before tax 314 1,162
Less: Tax 46 384
Profit after Tax 268 778
Required: (i) Calculate for the year 2017-18
a. Inventory Turnover Ratio
b. Return on Net worth

c. ROI
d. Profitability ratio
(ii) Give a brief comment on the financial position of M Ltd.
Reconciliation of profit as per the financial and cost records [to be disclosed in Part D-2 of
the Annexure to Cost Audit Report]
When the Cost and Financial accounts are kept separately, it is imperative that these should be
reconciled, otherwise the Cost Accounts would not be reliable. Reasons for difference between the
Cost accounts and Financial accounts may be as follows:
A. Items appearing only in financial accounts and not in cost accounts such as:
(a) Profit / Loss on sale of assets
(b) Interest received / paid
(c) Dividend received / paid
(d) Rent receivable
(e) Share Transfer fees
(f) Preliminary expenses written off
(g) Goodwill written off
(h) Underwriting commission and debenture discount written off
B. Under or over-absorption of overhead (i.e. In cost accounts overheads are charged to production
at pre-determined rates whereas in financial accounts actual amount of overhead is charged)
C. Different basis of stock valuation (i.e. in financial books, stocks are valued at cost or market
price, whichever is lower. In cost books, however, stock of materials may be valued on FIFO or
LIFO basis and work-in-progress may be valued at prime cost or works cost)
D. The amount of depreciation charge may be different in the two sets of books either because of
the different methods of calculating depreciation or the rates adopted. In company accounts, for
instance, the straight-line method may be adopted whereas in financial accounts It may be the
diminishing balance method. NİkḱҺil Güptȧ
Following format may be used for reconciling the costing profit with financial profit
Particulars Amount
Profit or Loss as per Cost Accounts
Add: Incomes not considered in cost accounts
a)
b)
c)
Less: Expenses not considered in cost accounts

a)
b)
c)
Add / Less: Difference in Valuation of stock between financial accounts and cost
accounts
Profit or Loss as per Financial Accounts
Illustration 10: XYZ Ltd. has furnished the following information from the financial books for the
year ended 31st March 2009:
Profit & Loss A/c
Rs. Rs.
To Opening Stock 70,000 By Sales (10250 units) 28,70,000
(500 units at Rs.140 each) By Closing Stock
To Materials consumed 10,40,000 (250 units at Rs.200 each) 50,000
To wages 6,00,000
To Gross Profit C/d 12,10,000
29,20,000 29,20,000
To factory overhead 3,79,000 By Gross Profit B/d 12,10,000
To Administrations overhead 4,24,000 By Interest 5,000
To Selling Expenses 2,20,000 By Rent 36,000
To Bad Debts 6,000
To Preliminary Exp. 30,000
To Net Profit 1,92,000
12,51,000 12,51,000
The Cost Sheet shows the cost of materials at Rs. 104 per unit and the labour cost at Rs. 60/- per unit.
The factory overheads are absorbed at 60% of labour cost and administration overheads are 20% of
factory cost. Selling Expenses are charged at Rs. 24 per unit. The Opening Stock of finished goods
is valued at Rs.180 per unit.
You are required to prepare:
a) A statement showing profit as per cost A/c for the year ended 31.03.2009.
b) A statement showing the reconciliation of profit as disclosed in cost A/c and the profit shown
in financial A/c. (June 2009)
Illustration 11: The profit as per financial accounts of XY Cement Ltd, for the year 2010-11 was
Rs. 1,34,27,561. The profit as per Cost accounting records for the same period was more. You are
required to prepare a reconciliation statement and arrive at the profit as per cost accounts. The
following details are collected from the financial accounting schedules and cost accounting records.
Particulars Financial Accounts Cost Accounts

Value of Stock

- Opening WIP 29,52,315 23,45,720

- Opening FG 2,48,37,410 2,72,16,930
- Closing WIP 41,72,635 36,36,345
- Closing FG 3,67,51,400 4,15,24,148
Interest income from inter-corporate deposits 6,14,250 -
Donations given 4,75,250 -
Loss on sale of fixed assets 1,04,148 -
Value of cement taken for own consumption 3,75,920 3,45,200
Cost of power drawn from own wind-mill:
- At EB Tariff 48,58,415
- At cost 34,10,420
(June 2011)
Illustration 12: The Cost Accountant of SOVANA SUGAR MILLS LTD. has arrived at a profit of
Rs. 73,24,150 based on Cost Accounting records for the year ended March 31, 2013. As Cost
Auditor, you find the following differences between the Financial Accounts and Cost Accounts:
(i) Decrease in value of Closing WIP and Finished goods inventory as per Financial
Accounts Rs. 128,21,995 as per Cost Accounts Rs. 131,04,220
(ii) Profit on Sale of Fixed Assets Rs. 61,500
(iii) Loss on Sale of Investments Rs. 11,200
(iv) Voluntary Retirement Compensation included in Salary & Wages in F/A Rs. 16,75,000
(v) Donation Paid Rs. 25,000
(vi) Major Repairs & Maintenance written off in F/A Rs. 13,26,000 (Amount reckoned in
Cost Accounts of Rs. 6,08,420 for this job)
(vii) Insurance Claim relating to previous year received during the year Rs. 14,29,000
(viii) Profit from Retail trading activity Rs. 7,12,300
(ix) Interest Income from Inter-Corporate Deposits Rs. 6,15,000
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Financial
Accounts.
Illustration 13: Autoparts Manufacturing Company Ltd. showed a profit for the year 2016-17 as Rs.
35,46,700. During the course of Cost Audit, the following transactions were noticed:
(i) an old machine with net value of Rs. 6,54,000 was sold off for Rs. 9,30,000
(ii) dividend income was received amounting to Rs. 84,500 from investments
(iii) a sum of Rs. 58,000 was spent towards CSR commitment
(iv) the company was engaged in trading activity where purchase of goods was Rs. 13,50,000
and sales was Rs. 13,42,300, after incurring Rs. 40,800 as expenditure
(v) some renovation work was carried out at a cost of Rs. 7,75,000 and its useful life was only
for five years. NİkḱҺil Güptȧ
(vi) the closing inventory of raw material was undervalued Rs. 29,600 and that of finished
goods was overvalued Rs. 65,400 in the financial records.
Work out the Profit as per the Cost Accounts.


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Companies (Cost Records and Audit) Rules, 2014 Cost and Management Audit 2.

FYK - HISTORY OF RULES IN INDIA2

2) Multiplicity of Rules to Unity of Rules –

The adjacent picture showcases an Order

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Rule 1: Short title and commencement

Cost Records means books of account relating to - 1) utilisation of materials, 2) utilisation of

Rule 3: Application of Cost Records

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Category B: Unregulated Sector - 33 industries

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FYK 2 - A private company is into the business of modification as well as construction

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FAQs issued by the Institute

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FYK 4 - Is there any Section 2(91) of the Companies Act,

Sales: Manufactured products 43,750

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Income from job works 780

A: Generation of scrap is not a production or processing or manufacturing but is incidental to

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Rule 4: Applicability of Cost Audit

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In a nutshell, monetary threshold for getting the cost records audited:

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b) which is operating from a Special Economic Zone8; or

Selling of Imported Products A, B & C as it is without Packing Repacking (Trading Activity)

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FAQs issued by the Institute

Captively consumed (CC)

100% Captive consumption 100% Captive consuption

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Rule 5: Maintenance of Records

Cost records shall be maintained on a regular basis (monthly or quarterly or half-yearly or

Annexures to the cost audit report (i.e. Form CRA 3)

PART B (FOR MANUFACTURING SECTOR)

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PART C (FOR SERVICE SECTOR)

PART D (FOR BOTH MANUFACTURING AND SERVICE SECTOR)

Some important points to be noted regarding the above-mentioned annexures

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In case of delay in filing Form CRA 2 and CRA 4 with MoCA

FAQs issued by the Institute

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Rule 6: Cost Audit (including procedure of appointment of a cost auditor)

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Section 148 of the Companies Act, 2013 (Part III)

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Whether a Company can appoint more than 1 cost auditors 22

No. of products No. of Auditors Remarks

Process Input / Output Kgs.

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1) Capital Work In progress

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Illustration 2: The following is the abridged Balance Sheet of BEEKAY Ltd.:

Calculate the following for the company as a whole:

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(December 2010; Similar question in December 2014)

Net Block 86,650 72,350

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