COST AUDIT Meaning and Definitions of Cost Audit:

According to the Institute of cost and Works Accountant of London, cost audit is the verification of the correctness of cost accounts and adherence to the cost accounting plans. In the words of smith and Day, the term cost audit means, the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accounting. J.G. Thike in his book Cost Audit and Management Audit observes, Cost audit would apparently mean an examination of cost books, cost accounts, cost statements and subsidiary and prime documents with a view to satisfying the auditor that these represent at a fair and true view of the cost of production. From the above definitions, it would be evident that cost audit is designed to verify that the cost accounts are correctly kept in accordance with the principles of cost accounting, to ensure that cost accounting system laid down by the business is properly carried out, to detect errors and prevent fraud and misappropriations. Further, cost audit seeks to ensure that cost has been correctly compiled and ascertained. Thus, in simple words, we can say that, cost audit is the systematic examination and verification of the correctness of cost accounts, costing techniques and system so as to ensure the adherence of the same to the cost accounting plans and objectives.

Objectives of Cost Audit:

The purpose and objectives of introducing cost audit by inserting clause (d) under sub-section (1) of section 209 of the Companies Act, 1956, as then stated in the bill were to ensure that in respect of companies engaged in production, processing, manufacturing or mining activity, proper records relating to utilization of material and labour are available which would make efficiency audit possible. However, the general objectives of cost audit are given as follows: 1. To examine and verify the cost accounting records maintained by a company.
2. To ensure that principles of cost accountancy have been fully applied in maintaining

cost records properly. 3. To ensure that cost accounting procedures and routines as predetermined or planned by the management are properly followed. 4. To detect and prevent errors, frauds or misappropriations. 5. To see how far the existing procedure of cost account is helpful to the management for taking decisions.
6. To bring forth the deficiencies in the use of material labour and other resources. 7. To determine the adequacy of costing system, procedure, routines, reports and

statements followed by the company.

8. To reflect a true and fair view of the cost of production as far as possible. 9. To ensure the integration of cost accounting system into the total system of the

organization and to provide for reconciliation of cost and financial accounts.

Advantages of Cost Audit:

Cost Audit offers many benefits to the management company, shareholders, consumers, workers, Government and the public at large. The important advantages of cost audit are summarized as below:

(a) Advantages to the Management/Company:

1. Cost audit serves as a positive aid in cost control and cost reduction. It also helps in choosing economical methods of production and reducing cost of production. 2. It increases the efficiency of financial audit and helps to detect and deal with cases of dishonesty and fraud.
3. It helps to improve efficiency in the use of material, labour, plant and other

resources.

(b) Advantages to Shareholders:

1. Cost audit ensures the shareholders that proper records are maintained by the

company.
2. It also ensures them that the company has been working efficiently and

economically.
3. Cost audit enables the shareholders to obtain a fair return of their investment

in the company.

(c) Advantages to the Consumers:

It is not only the company and the shareholders who are benefited by the cost audit, but the consumers are also benefited as below:
1. Cost audit serves the interest of consumers by providing essential information

for fixation of fair prices.

2. Since cost audit helps in reducing wastages, increasing productivity and

reducing costs, it is beneficial to the consumers by way of reduced prices to them.

3. It also aids in raising the standard of living of the consumers by providing

better quantity products at comparatively cheaper prices.

(d) Advantages to Workers:

1. The workers are also benefited from the cost audit by way of increased

profitability resulting into higher bonus, better working conditions, and increased facilities, etc.
2. Cost data/audit reports can also be useful in settling many trade disputes

between the management and the workers, such as higher wages, bonus, profit sharing, etc.
3. Cost audit stimulates workers to improve their efficiency and earn more. It

also highlights the role of labour in improving productivity.

(e) Advantages to Government and Public:

1. Cost audit reports help to determine the quantum of duty drawback and also

prevent additional out go of foreign exchange on imports which otherwise may be misutilised.
2. The data available in the cost audit reports can be used to regulate custom and

excise duties on the inputs used for various products as well as the end products. 3. Cost audit reports help the government authorities to determine whether the benefits of tariff and other concessions are being passed on to the public or not.

MANAGEMENT AUDIT Definitions of Management Audit:

William P. Leonard: A comprehensive and constructive examination of an organisational structure of a company, institution or branch of Government or of any component thereof, such as a division or department, and its use of human and physical facilities. Leonard has covered all aspects of business in the orbit of management audit. As per his definition, management audit aims to evaluate plans and policies for determining whether the physical resources of the concern have been properly utilized or not. Leslie R. Howard has given a comprehensive definition of management audit. According to him, Management audit is an investigation of business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with the outside world and the most efficient organisation and smooth running internally. It is observed that management audit facilitates the most effective relationship with the outside world and the internal efficiency of the business. Taylor and Perry has given another definition, Management Auditing is a method to evaluate the efficiency of management at all levels throughout the organisation, or more specifically, it comprises the investigation of a business by an independent body from the highest executive level downwards, in order to ascertain whether sound management prevails throughout, and to report as to it efficiency or otherwise, with recommendations to ensure its effectiveness where such is not the case. It is an investigation by an independent organisation to find out whether the management is carried out most effectively or not. In case there are drawbacks at any level then recommendations should be given to improve managerial efficiency. Thus, it is clear that management audit is an evaluation, appraisal and review of managerial policies and programmes to ascertain whether they are carried out efficiently or not. If the work is not done satisfactorily then recommendations are made to take corrective actions.

Objectives of Management Audit:

The main objective of management audit is to find out whether the work at all levels is undertaken efficiently or not and also to make recommendations for its improvement, if necessary. The following are some of the objectives of management audit:
1. The first objective of management audit is to see whether the business is managed

efficiently or not. The management at all levels, from top to lower levels, is reviewed.
2. If there is a need to make improvements or management is not done effectively then

suitable recommendations are made to tone it up.

3. Whether the plans and programmes are executed properly or not? 4. It suggests ways and means of increasing managerial efficiency. 5. It also aims to help management at all levels in the effective and efficient discharge of

duties and responsibilities.

6. The organisational structure is also reviewed to assess whether it can achieve overall

business objectives or not. If there are deficiencies then changes in organisational are suggested.

Scope of Management Audit:

The primary purpose of management audit is to find out the efficiency of every segment, from top to bottom, of business. So it requires the study of each and every aspect of the enterprise. The following aspects form the scope of management audit.
1. The present organisational structure is reviewed in relation to current and prospective

demand of the business. The study of organisation should be undertaken in relation to the aims and objectives of the enterprise.
2. It will include the study of present return on investors capital. Whether the return is

adequate, fair or poor should be determined by the management auditor.

3. Management audit also requires the study of relationship of the business with the

shareholders and investing public in general.

4. The performance of the concern should be compared with that or other firms in the

same field. The ratios like operating returns on sales and return on capital should be compared to find out the comparative position of the business.
5. The aims, objectives and duties of the management should also be studied by

management auditor. This exercise should be undertaken at Board of Directors level.

6. The study of financial planning and control also forms the part of management audit.

The efficacy of sources of finance and the use of funds for capital and other expenditure should be evaluated to determine the efficiency in raising and utilising the funds.
7. The review of production and sales function is also an important aspect of

management audit. Whether the production is undertaken efficiently or not? This can be assessed by comparing with that of other concerns. Similarly, the performance of sales department should be judged by looking at its past performance and future possibilities. The sales should be quick and efficient and distribution channels should be as economical as possible.

Need For Management Audit:

The management of business at present is becoming more and more complex. The use of specialised techniques such as operation research, statistical sampling, electronic data processing, production control, etc. requires the service of experts. The Board of Directors are at the helm of affairs in company form of organisation. The directors are not experts in every field of management. If anything goes wrong then directors have to face the criticism. This has necessitated the need for management consultancy. The management auditors are often called upon to advise the firm as how to maximise the production of quality goods. Management audit or consultancy helps in improving the operations of the business. The benefits derived from this service are far more than the cost incurred on it. Following are some of the benefits of management audit:
1. Enables performance appraisal. Management audit enables appraisal of performance

of various managers. The standards for every managers are pre-determined and their performance has to be judged in view of these targets. There should be a regular system of evaluation for keeping efficiency standards. Various incentive plans may also be linked with such reports. 2. Result Oriented. Management audit is result oriented. The performance is judged on the basis of rates of inputs and outputs. It does not give much importance to the procedures followed and formalities completed which is generally done in statutory audit. It is generally said that when management audit is introduced the managers will be more particular about completing the file work only. This is not true. In management audit the results are more important than file work. The inputs available to the manager such as man-hours, wages, materials, overheads, etc., are compared to the outputs like production, return of performance, etc. So management audit gives emphasis mainly to results.

3. Satisfies Financial Institutions. When a concern approaches various financial institutions for loans then they will like to see the performance of the business. If management system audit is already undertaken than lending institutions will not find any difficulty in taking a decision. Moreover, outside agencies will feel satisfied that the management is constantly evaluating its performance.
4. Helpful in Entering Foreign Collaborations. Whenever there is a proposal to enter into

a foreign collaboration then collaborators will not find any difficulty in assessing the managerial potential of the party. They can be provided with management audit report which will enable the parties to form a judgement about the concern.
5. Necessary for Government Organisations. There is an urgent need for management

audit in government organisations. The present system of audit is not useful in curbing inefficiency. It gives more importance to formalities and ignores performance. Management audit will emphasise results and when performance will be judged against predetermined standards then officials will try to improve their efficiency. So management audit will be very helpful in government organisations because it will constantly evaluate the performance of officials. The promotions and increments etc., should be linked to the results shown by them. This will help in increasing the efficiency of these organisations.

COST REDUCTION AND COST CONTROL

Differences between Cost Control and Cost Reduction

COST REDUCTION COST CONTROL

1. It aims at achieving a reduction in It aims at achieving the pre-determined cost unit cost of goods manufactured or targets and ends when the targets are services rendered without impairing achieved their suitability for the use intended. 2. It does not recognise any condition as It entails target setting, ascertaining the permanent and believe that by waste actual performance and comparing it with the reduction, expense reduction and targets, investigating the variances and taking increased production cost reduction remedial measures. objective can be achieved 3. It assumes existence of concealed It does not challenges norms or standards potential savings and challenges the established for the purpose. norm 4. It is a corrective function. It is a preventive function.

5. In cost reduction, standards which are Cost control lacks the dynamic approach the basis of control are constantly which planned cost reduction demands. challenged for improvement. 6. It is a continuous process involving Cost control sometimes lacks dynamic dynamic approach. 7. The emphasis here is partly on the present costs and largely on future costs. approach. The main stress is on the present and past behavior of costs

ADVANCED COST ACCOUNTING ASSIGNMENT

Name: Nikhil. G. Kunkolienkar Class: M.Com II

Roll No: 11