State the Necessary of Cost Audit - QS Study
QS Study

Cost Audit is the verification of accounts and cost records and a careful compliance accounting process. It is performed by an independent, professionally qualified Cost and Management Accountant or Chartered Accountant. By the term cost audit is meant the detailed checking of the costing system technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.

The importance of cost audit are briefly discussed as follows:

The necessity of Cost Audit to the Management:

  • Cost audit provides reliable cost data for managerial decisions.
  • It helps management to regulate production.
  • It acts as an effective managerial tool for the detection of errors, frauds, and irregularities so that reliable and smooth functioning of the system is continued.
  • It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
  • It can fix the responsibility of an individual wherever irregularities or wastage are found.
  • It improves the efficiency of the organization as a whole and costing system in particular by a constant review, revision and checking or routine procedures, and methods.
  • It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
  • It also enables comparison among different units of the factory in order to find out the profitability of the different units.
  • Cost audit exercises moral influence on employees which keeps them efficient and alert.
  • It ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry concerned.

The necessity of Cost Audit to the Shareholders:

(a) Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses immured on various items i.e., wages and overheads etc. It also makes sure that the industrial unit has been working efficiently and economically.

(b) The cost audit enables shareholders to determine whether or not they are getting a return on their investments. It reflects the managerial efficiency or inefficiency.

(c) It ensures a true picture of company’s state of affairs. It reveals whether the resources like plant and machinery are being properly utilized or not.

The necessity of Cost Audit to the Society:

(a) Cost audit tells the true cost of production. From this, the consumer may know whether the market price of the article is a fan or not. The consumer is saved from the exploitation.

(b) It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.

(c) Since price increase by the industry is not allowed without justification as to increase the cost of production, consumers can maintain their standard of living.