Cost Audit Importance and Compliance for Companies

As the name suggests “Cost audit” is the audit of cost records. It is the verification of the cost of production of any product, service or activity on the basis of accounts maintained by an enterprise in accordance with the accepted principles of cost accounting.

The Government of India has now made it mandatory for specified industries to conduct a cost audit so as to evaluate of the efficiency of operations and the propriety of management actions. Ministry of Corporate Affairs (MCA) has henceforth, set the stage for collection of the authentic industry information, duly approved by Board of Directors and verified by a cost auditor for use by various ministries.

Why has cost audit become mandatory?
Cost audit has been made mandatory for specified industries only. Since these industries generally cater to essential commodities which are required by the public at large and play an important role in the economic development of the country, they have come under the scope of cost audit. Some of the reasons behind making it mandatory are as below:

1. To monitor any lacunae in the cost accounting system for certain industries, which provides the basis for decision making by the management.
2. The data from these reports, helps the government in fixing prices of various essential commodities like fuel, power, raw materials etc
3. The regulators can take decisions based on the data and can keep a control on certain malpractices like over or under pricing and other unethical practices.
4. This data helps companies in regulating various costs and optimal utilization of resources. The true picture of the assets is placed before the management.
5. It helps the consumers getting products at reasonable prices.

The MCA vide notification dated 3rd May, 2011 had issued mandatory cost audit orders. It is applicable to every company including a foreign company as defined u/s 591 of the Act which is engaged in Manufacturing, Production, Processing, Mining Activities and satisfies any of the following criteria :‐
1. Aggregate value of net worth on the last day of preceding financial year was more than 5 crores; Or
2. Aggregate value of the turnover of sales and other activity of all the products exceeds 20 crores in the preceding year; Or
3. The debt or equity securities of the company are listed or are in process of getting listed on any of the stock exchanges in India or outside India.

Industries covered in the ambit of Cost audit
Industries which are covered include those engaged in production, processing, manufacturing or mining of the products along with Telecommunication, Petroleum, Electricity, Sugar, Fertilizer and Pharmaceutical Industry to name a few.
A complete list of Industries/products is available at the MCA website at

Compliances  under Cost Audit
A. Maintenance of records
Every company to which these rules apply, including all units and branches shall, in respect of each of its financial year commencing on or after the 1st day of April, 2011, keep cost records.
All cost records and statements have to be maintained for a period of atleast 8 years.

B. Reporting 
A compliance report (along with the annexure) has to be submitted to the Central Government in XBRL format for each financial year (FY) duly certified by a cost auditor,
The report is to be submitted within 180 days from the close of the FY.
The Annexure has to be approved by the Board before submission to the Central Government.
It shall be signed by the Company Secretary and at least one Director on behalf of the company. In the absence of Company Secretary in the company, the same shall be signed by at least two Directors.
Forms and formats have been prescribed by MCA for the purpose of compliance as below:
 Form 1 – Cost Audit Report to be filed with the Central Government
 Form B – Form of Compliance Report
 Annexure to form B – Annexure of Compliance report

C. Appointment of Cost Auditor
The procedure for appointment of cost auditor has been amended vide circular 15/2011 dated April 11, 2011 as below:
Company to issue a formal letter proposing Appointment / Re-Appointment of Cost Auditor after discussion with the Board
Cost Auditor to issue a certificate for his qualification and independence to the company
Company to e-file Form 23C with the Registrar of Companies for approval of Central Government within ninety (90) days from the date of commencement of each financial year, for such appointment.
The company to issue a formal letter of appointment within 30 days of approval by the Central Government. The application shall be deemed to have been approved within 30 days if nothing to the contrary is heard from the Central Government.
Appointed cost auditor to intimate the Registrar of Companies in form 23D along with the copy of appointment letter.
The Company shall be liable to be punished with fine which may extend to INR 5000 along with the cost auditor who has made false certification, and every officer of the company who is in default shall be liable to be punished with imprisonment for a term which may extend to three years, or with fine which may extend to INR 5000 or with both.
The cost audit becoming mandatory for some important industries is a good step in the right direction. With cost reports enabling companies to get appropriate cost and revenue information, strategies benefitting the various stakeholders can be formulated and implemented. It is now the responsibility of the boards of companies to make use of these reports to strengthen its reviewing mechanism and optimally use its resources.