The price is equal to the cost plus profit. Cost affects the price and price affects consumers. A close look at cost and how it is ascertained in industrial production is referred to as a cost audit. Such audits help in controlling the cost of production, ensuring efficient usage of resources, and protecting consumers’ interests. A cost audit helps producers by making sure the information is correct and letting them make better decisions.
What is a Cost Audit
“The Verification of Cost Records and Accounts and a Check on Adherence to the Cost Accounting Procedures and Their Continuing Relevance”, Chartered Institute of Management Accountants.
Primarily, a cost audit is a systematic examination of the cost accounts or costing system of a manufacturing concern. The main purpose of the cost audit is to ensure optimum utilization of resources. It supports the basic notion of economics that resources are limited, so economic decisions must be based on rational thinking. It means that efforts should be focused on deriving maximum output from the minimum use of resources. Cost audit brings efficiency and control in using economic resources. This, therefore, helps in prudent economic decisions.
The importance of Cost Audit
Cost audits play a significant role in protecting organizational resources. The basic objective of every business is to ensure maximum output from the minimum consumption of resources so that they can benefit for a longer duration. A company generates revenue by using the resources it owns or borrows. Resources include all assets of the company having economic value and that contribute towards revenue generation and business growth. It is in the vital interest of the company, especially a manufacturing firm, to implement cost auditing procedures in letter and spirit for the long-term sustainability of its business model.
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The social objectives of cost audit indicate that it is important for society as a whole. Efficient use of economic resources in all industries is significant for the country. Cost auditing assists an economy by contributing to increased output, availability of quality products, protection of investments in economic assets, and just pricing of goods and services.
Advantages of Cost Audit
There are many stakeholders who could benefit from a cost audit if it is implemented across industries, particularly in the manufacturing sector. It is advantageous for the industry, consumers, investors, and the government.
Advantages of Cost Audit to the Industry
An industry needs efficient players to flourish and grow. If industrial resources are utilized with efficient management
, they will last longer and give more output. Cost audits help the industry protect assets from destruction, wastage, pilferage, and under-utilization. Moreover, cost audits help the management to accurately accumulate all the relevant production costs. This ultimately benefits from the perspective of recovering all costs and determining the correct prices of manufactured products.
A cost audit also assists in identifying weaknesses in the cost accumulation process that can be improved with corrective measures and proper resource mobilization. In large manufacturing concerns, there are plenty of resources such as raw materials and labor to be consumed or utilized during the production process. There may be over-consumption causing extra costs or hidden costs. By adopting the right procedures for cost auditing, such occurrences of over-consumption or hidden costs can be avoided. A cost audit can rightly be termed an efficiency audit.
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Advantages of Cost Audit to the Shareholders
Shareholders are interested in higher returns on their investments. That is why profit maximization is one of the core objectives of any company. It is required to satisfy shareholders with good dividend payments and greater value to their shares. This objective cannot be achieved without exercising firm control over the costs of production or doing business. A cost audit helps companies maximize profitability through introducing cost controls and resource efficiency that benefit the shareholders through maximizing their return on investment
Advantages of Cost Audit to the Consumers
The ultimate beneficiaries of cost audits are the consumers. They suffer due to inflation and an unjust price hike. Companies determine prices based on the cost of goods or services. They incur costs in making the products available for sale to the consumers. If there is no right procedure in place to control unnecessary costs, that can impact the price. Therefore, it is in the vital interest of consumers that producers ensure proper implementation of cost auditing so that true costs can be ascertained for determining just prices of the products.
Advantages of Cost Audit to the Government
For governments, the implementation of cost audits across industries is extremely helpful. The government is always in a position to enforce cost auditing throughout the industry by introducing a regulatory framework. It can make it mandatory for manufacturing companies to maintain cost accounts as per standard procedures, get them audited, and publish them for the information of the general public. There is a difference between audit of financial accounts and cost accounts
. The government can require the companies to publish the audited cost accounts in a similar way to how they publish financial statements. Cost audits assist the government in a number of ways mentioned as follows.
Check on Profiteering
Profiteering is malpractice. It means earning undue profits by charging unjust prices to consumers. 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 be unable to fix unjust prices.
Governments make multiple decisions to facilitate industries regarding ease of doing business. It often 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 accurate reporting of cost accounts.
Positive Impact on the Economy
Cost audits lead to efficiency that results in increased output based on fewer resources. It drives optimum utilization of resources that are already limited. The efficiency and effectiveness at the industrial level positively impact the overall economy. Furthermore, the 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 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 formats 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.
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. Therefore, a qualified management accountant, a cost accountant, or a chartered accountant can serve the true purpose of cost auditing.
Cost audits are truly beneficial for all stakeholders. The government can play a pivotal role by introducing relevant statutes and enforcing regulatory frameworks for an effective cost auditing mechanism throughout the industrial sector
. As a result, a number of economic and social payoffs can be expected, such as enhanced productivity, resource efficiency, and protection of consumers’ interests.