cost calculation and cost audit

Benefits of Cost Audit: Uncovering the Economic and Social Advantages

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Cost & Management Accounting

The benefits of cost audit cannot be overstated, especially in industrial production where a product’s price is based on its cost and profit. The cost of production has a direct impact on the final price of the product, which in turn affects consumers indirectly.

This is precisely where cost audit plays a crucial role in ensuring that businesses maintain a sustainable cost structure, leading to numerous benefits for all stakeholders involved.

It is the process of closely examining the cost and how it is determined in the production process. A cost audit is an audit of production costs that optimizes resource utilization and safeguards consumers’ interests.

Cost audit. Benefits of cost audit
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Moreover, cost audit benefits include making informed decisions based on accurate information. In this article, we will delve into the various economic and social benefits of cost audits.

What is a Cost Audit

According to the Chartered Institute of Management Accountants, a cost audit verifies cost records and accounts while checking adherence to cost accounting procedures and their continuing relevance.

In essence, a cost audit is a systematic examination of the cost accounts or costing system of a manufacturing concern.

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The primary objective of a cost audit is to ensure that resources are used optimally. This is essential because resources are limited, and economic decisions must be based on rational thinking.

The focus, therefore, should be on obtaining maximum output from minimum resource utilization. Cost audit promotes efficiency and control in the use of economic resources, leading to prudent economic decisions.

Protecting Organizational Resources through Cost Audits

The primary objective of every business is to maximize output from the minimum utilization of resources to benefit for a longer duration. This is where cost audits come in, playing a significant role in ensuring the efficient usage of resources and protecting organizational assets.

A company’s revenue generation and growth rely on its resources, which include all of its economic assets. Therefore, implementing cost auditing procedures is essential, especially for manufacturing firms, to ensure the long-term sustainability of their business models.

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By conducting regular cost audits, companies can identify areas where they can cut down costs, prevent losses due to inefficiencies, and ensure maximum utilization of resources.

The Importance of Cost Audits in Maximizing Efficiency

In industry, efficient management of resources is crucial for growth and sustainability. Cost analysis play a crucial role in protecting industry resources from wastage, pilferage, and under-utilization, thereby ensuring that they last longer and give maximum output.

The image shows arrows depicting that while cost should go down, efficiency and quality should go up. Benefits cost audit.
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They also help in accurately accumulating production costs, recovering all costs, and determining the correct prices of manufactured products. By identifying weaknesses in the cost accumulation process, cost audits enable corrective measures. This results in resource optimization, improved cost efficiency, and an enhanced level of control.

Large manufacturing concerns often have abundant resources like raw materials and labor to be consumed or utilized during the production process. However, there may be instances of over-consumption causing extra or hidden costs.

Cost auditing procedures can help identify and prevent such occurrences, thereby introducing efficiency audits in the system. 

Advantages of Cost Audit to Shareholders

A cost audit not only benefits the organization itself but also its shareholders. Shareholders are interested in seeing a higher return on their investments, and profit maximization is one of the core objectives of any company.

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Without exercising firm control over the costs of production or doing business, this objective cannot be achieved. Cost audit helps companies maximize profitability by introducing cost controls and resource efficiency. Such measures ultimately benefit the shareholders by maximizing their return on investment.

Therefore, shareholders should view cost audits as a valuable tool in ensuring their investments are protected and their returns are optimized.

Advantages of Cost Audit to Consumers

Cost audits play a vital role in protecting the interests of consumers. The pricing of goods and services is influenced by the cost incurred by producers to make them available for sale.
 
If there are unnecessary costs in the production process, it can lead to an unjust price hike, causing inflation and ultimately hurting consumers. Cost auditing ensures that proper procedures are in place to control costs and accurately determine the true costs of production.
 
 
With accurate cost information, producers can set just prices for their products, benefiting consumers in the long run. The implementation of cost auditing procedures can help safeguard consumers’ interests, ensuring that they are not subjected to unreasonable price increases.

Advantages of Cost Audit to the Society 

The Cost audit is a valuable tool for achieving the social and economic objectives of a society. The social objectives emphasize the importance of the efficient use of economic resources across all industries, which is crucial for the growth of the country.

Cost audit is instrumental in promoting an economy by enabling increased output, availability of quality products, safeguarding investments in economic assets, and ensuring cost transparency for just pricing of goods and services. These benefits contribute significantly to the overall development of society and the economy.

Advantages of Cost Audit to the Government

For governments, the implementation of cost audits across industries is extremely helpful. Statutory cost audits are applicable only to certain industries. However, the government is always in a position to enforce cost auditing throughout the industry by introducing robust regulatory frameworks.
 
 
Government can make it mandatory for manufacturing companies to maintain cost accounts as per standard procedures, get them audited, and public them for the information of the stakeholders and general society.
 
For the Government, it is also important to understand the difference between a financial audit and a cost audit. The government can require the companies to publically present the cost auditing reports in a similar way they present financial statements.
 
Cost auditing can assist the government in a number of ways mentioned which may include the following.
 

Check on Profiteering 

Profiteering is malpractice. It refers to the practice of earning undue profits by charging unjust prices. This happens mainly due to monopolistic behaviors in the economy where few producers form monopolies or cartels and start charging wishful prices. Such behavior leads to the exploitation of consumers.
 
 
For governments, protecting consumers’ interests is extremely important. Cost audits help the government to exercise a check on profiteering. If the companies are required to report true costs, they will certainly be unable to fix unjust prices.
 

Policy Decisions

Relying on cost audit reports, Governments can take multiple policy decisions to facilitate industries regarding ease of doing business. Sometimes Government also subsidizes major cost components to promote certain industries. 
 
Other issues, such as tax exemptions, duty relaxation, and credit facilities, may be decided by the government based on the industry’s reliable reporting of cost information.
 

Positive Impact on the Economy

Cost audits lead to efficiency that results in increased output based on the consumption of fewer resources. It drives the efforts for optimum utilization of resources that are already limited.
 
 
The efficiency and effectiveness at the industrial level positively impact the overall economy. Furthermore, industrial resources can be utilized to their capacity and are saved from over-under consumption, wastage, and pilferage. 

Special Features of the Cost Audit

A cost audit program is different from a financial audit. There are no standardized reports like financial statements which can be examined through a pre-defined process. Cost audit instead involves complex management issues that require a dynamic approach to evaluate the relevant records.

Production methods vary from product to product and industry to industry. Costing records and reports vary in format and quantity or quality of information. There could be redundancy in records and the presence of irrelevant information. All this necessitates special care and professional capabilities to understand the costing process. 

Book: Audit Costs A Complete Guide

Benefits of cost audit. Audit Costs A Complete Guide

For instance, a cost audit involves an accurate assessment of inventories, raw materials, and work in progress. It requires a comparison of current and historical costs. Moreover, costing procedures for batch production, job production, and process production are different.

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Therefore, a qualified management accountant, a cost accountant, or a professional accountant can serve the true purpose of cost auditing. 

Conclusion

Cost audits have proven to be highly advantageous for all stakeholders involved. To fully realize these benefits, it is crucial for governments to take the lead by enacting appropriate regulations that will ensure an effective cost-auditing mechanism across all industries.

This will result in numerous economic and social advantages, including increased productivity, improved resource efficiency, and protection of consumers’ interests.

As consumers and members of the public, it is important for us to support the implementation of cost audits as they protect our larger interests and minimize resource wastage. Therefore, I encourage you to share your views on this topic and take action by advocating for the benefits of cost audits in your respective communities.

Let us work together towards a more sustainable and responsible future. 

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Mr. Adil Abbasi is a Chartered Management Accountant (CMA) from ICMA Pakistan. He has a wealth of experience, having worked in various roles for over 15 years. Mr. Abbasi is proficient in QuickBooks online and is also a professional blogger. He blogs about accounting and finance..

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