What Is Cost Audit ?
Cost audit is conducted to ensure the correctness of the cost records maintained by the firm. It is a critical examination of costing system which helps to verify the arithmetical accuracy of cost accounts. It provides correct cost data which helps the management to detect errors and loopholes in the accounting system. It helps to regulate manufacturing process, minimize wastage of materials and unnecessary expenses, provides suggestions to fix the price of the product etc. It provides useful data and information to the management, investors, government and to the public.
Benefits Or Advantages Of Cost Audit
The main advantages of cost audit can be described as follows:
1. Ensures Correctness Of Cost Records
Cost audit is the examination of cost records and accounts maintained by the
company. It ensures correctness or arithmetical accuracy and gives clarity
about the cost accounting record. It provides valuable data and information to
the management, government, investors and to the public.
2. Identifies Loopholes And Frauds
It helps to detect frauds, errors and irregularities in cost accounting books.
It also identifies loopholes in the system and helps the management to
discover wrong practice. So, appropriate actions can be taken to eliminate
errors and irregularities.
3. Fixation Of Price
It determines the cost of production which helps the company to fix the
selling price of the product.
6. Beneficial For The Government
4. Cost Control And Reduction
Cost audit provides accurate cost data which helps the management to take
appropriate steps to control unnecessary costs and wastage in the production
process. It helps to lower the cost of production which leads to increase in
the profit.
5. Helpful To Make Decisions
It provides correct and reliable data and information about the cost of
production, sales, inventory, operational efficiency etc. It helps the
management to make proper decision to improve the performance.
Government authorities use cost data and information to set reasonable price
of essential products and services. Cost audit also helps to determine the tax
rate.
7. Beneficial For The Investors
Shareholders get up-to-date date that helps them to understand the progress of
the company. It ensures them that their money is utilized properly and
generating good return.
Drawbacks Or Disadvantages Of Cost Audit
The main disadvantages of cost audit can be highlighted as follows:
1. Lengthy Process
It requires sufficient time, effort and resources to conduct cost audit. It
may affect the daily routine work of the employees and organizational
activities.
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2. Expensive Process
Conducting cost audit may become very expensive because professional auditor
charges higher price for his work.
3. Not Applicable For Small Business
Because of the consumption of more cost, time, effort and resources, it is not
suitable for small firms having limited resources.
4. Chance Of Inaccuracy
Some portion of cost audit is based on the estimation which may give
inaccurate data and information in the audit report.
Pros And Cons Of Cost Audit In Short
Pros:
- It verifies correctness and arithmetical accuracy of the cost of production, inventory etc.
- Helps the management to make pricing decision
- It is helpful in cost reduction and to eliminate wastage
- Provides suggestions to take suitable steps to eliminate wrong practice in the system
- It provides correct cost data to the shareholders
- Government can fix the tax rate with the help of data obtained from it.
- It is very suitable for big manufacturing companies
Cons:
- It is not suited to small manufacturers
- It is lengthy process that requires more time, cost and effort
- There is a possibility of inaccurate data because of the dependency on estimation