Meaning of Cost Audit:

Cost audit is nothing but the verification of cost records and accounts and checking on the accuracy in adherence to the prescribed cost accounting procedures, plans and principles.Cost audit is nothing but verification of particulars related to utilisation of material, labour and other cost related variants for a given period of time.

Objectives of Cost Audit:

The main motive of cost audit is to determine the costs of various fixed and variable costs. The cost audit must ensure that the cost of production and cost of sales should include only those costs which are absolutely necessary and any other additional costs should be reduced to the extent possible. All the resources involved must be used in the most efficient way. 

Cost audit helps management to take necessary decisions regarding managing and maintaining the cost of the production at minimum and achieve optimum utilisation of available resources.

Cost Audit guides the management to take decisions on capacity utilisations, improvisation of flaws in the system, treatments of wrongly addressed costs etc. Therefore accounting on costs should be accurate.

The information provided in the cost audit report is important and helps not only companies but also the government to formulate policies and provide benefits to the various sectors. Therefore the Government via various acts and provisions made mandatory for certain sectors and companies the Appointment of cost auditor, maintaining cost records and data, conducting  cost audit by professionals and submit the results to the government. 

Section 148 of the Companies Act, 2013 prescribes the provisions related to applicability of cost audit for certain industries or class of companies and requirements for maintenance of cost records by certain categories of companies. We can find similar provisions were applicable under Section 233B of the Companies Act, 1956.  

Applicability of Cost Audit under Companies Act, 2013

  1. Section 148 of the Companies Act, read with 
  2. Rule 14 of the Companies (Audit and Auditors) Rules 2014 and 
  3. Companies (Cost Records and Audit) Rules 2014 

To understand the Applicability is divided into two parts:

  1. Applicability of maintenance of cost records and 
  2. Applicability of Cost Audit

The Central Government has prescribed the list of products and services for which maintenance of cost records and/or cost audit is applicable. The list is provided in a Table under Rule 3 of Companies (Cost Records and Audit) Rules, 2014, The list is divided into two- A. Regulated and B. Non-regulated sectors.

Item A - Regulated Sectors

Item B - Non-Regulated Sectors

Item B - Non-Regulated Sectors

Item B - Non-Regulated Sectors

Before understanding the concept of applicability, it is important to understand the meaning of “class of companies”. The Class of companies include both 

1. A company (Section 2(20)) - incorporated under the Companies Act 2013 or under any previous company law, and 

2. A foreign company (Section 2(42)) - company or body corporate incorporated outside India which-

  1. Has a place of business in India whether physically or electronic mode, by itself or through an agent; and
  2. Conducts any business activity in India in any other manner.

Note: It is also important to understand that the maintenance of cost records and cost audit as provided under Section 148 is applicable only to the companies which are covered in the table above.

Maintenance of Cost Records: 

Section 148(1) of the Act, read with Rule 3 Companies (Cost Records and Audit) Rules, 2014, prescribes that the companies engaged in the production of goods or production of services which are covered under in the Table Above, having an overall turnover from all its products and services of rupees thirty five crore (Rs. 35 crore) or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.

For example: The company is engaged in the production of cement, which is covered under non-regulated sectors item no. 14 above. The company has various varieties of cements. Apart from manufacturing cement, the company also provides service of supply of labour for construction and engineering service. Now if the turnover from all its products and services during the FY 2019-20 exceeds Rs. 35 crore, then the company compulsorily has to maintain cost records from FY 2020-21.

Mandatory Cost Audit:

Section 148(2) of the Act, read with Rule 4 of Companies (Cost Records and Audit) Rules 2014 empowers the Central Government to order in respect of such class of companies to get the cost records maintained audited from the cost accountant.

In case of  companies covered under Regulated Sector (Item A of the Table)

As per Rule 4(1) of the Companies (Cost Records and Audit) Rules, 2014, in case of Companies covered under Regulated Sector (Item A) of the Table, then it shall get its cost records audited if,

applicability of cost audit to regulated sector

In case of  companies covered under Non-Regulated Sector (Item B of the Table)

As per Rule 4(2) of the Companies (Cost Records and Audit ) Rules, 2014, in case of companies covered under Non-regulated Sector (Item B) of the Table, then the company shall et its cost records audited if,

applicability of cost audit to non-regulated sector

Non-applicability of cost audit in respect of certain companies

In case of following companies cost audit prescribed under Rule 4 of the Companies (Cost Records and Audit ) Rules, 2014 is not applicable: 

The company which is covered under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 and ,

  1. Whose revenue from exports, in foreign exchange, exceeds 75% of the total revenue; or
  2. Which is operating from a Special Economic Zone; or
  3. Which is engaged in the generation of electricity for captive consumption through the captive generating plant.

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