4. Power and Energy:
Complete record of costs and quantities of all types of power, fuel and energy such as electricity, compressed air, gas, steam, fuel oil, compressed air and electricity which may be generated/produced by the company itself, by its wholly owned subsidiary or sister concern, or purchased from outside, consumed by the industry, should be available. The cost and quantity consumed for production shall be shown in the relevant annexure, as required under the applicable cost accounting record order/rules. The records shall be so maintained as to enable assessment of consumption of power by different departments or manufacturing units or cost centers on a consistent basis. Allocation of cost shall be on the basis of actual consumption, if separate meters, measurement devices are installed; or on the basis of technical estimates, if separate measurement devices are not installed.
Cost of Fuel Purchased:
- Adequate record should be available to ascertain the cost of furnace oil/gas and/or other energy material purchased and charged to various departments/cost centers. If the cost of furnace oil or gas etc is allocated to different departments on basis other than actual cost, reconciliation with the actual cost and the treatment of variances should be indicated in the records.
- Records of receipts and issues should be so maintained as to clearly show any excess or shortage at the time of stock taking.
Power and Fuel Cost a Percentage of Cost:
- The cost auditor should examine the power and fuel cost as a percentage of the total cost. Energy costs have become important, not only because of the rising trend in prices, but because of scarcity of the material. Energy has to be conserved.
- In case any residuary inputs, such as bagasse in the sugar industry, are used as a source of energy, quantification and evaluation of such inputs should be examined. Both energy consumption and possible conservation should be discussed with the technical staff of the company. Moreover, progress made in implementing any energy conservation plan, indicated by the management in the Directors reports presented in AGMs, should be examined and commented upon in the Cost Auditor’s report.
5. Repairs and Maintenance:
Record of costs incurred on in-house repair and maintenance facility shall be examined and the basis on which the cost is allocated to various departments shall be examined. Some repairs and maintenance may have been carried out by outside contractors. Maintenance policy should be examined from cost benefit point of view. As regards the in-house maintenance facilities, classification of activities for activity based costing ABC may be a part of the maintenance policy. Indirect Material consisting of operating supplies/ consumable stores, as already observed, may be charged direct to production, but such indirect materials as are required for break-down maintenance (stores and spares) and for regular periodical/planned maintenance, shall be allocated on the basis of usage or maintenance service actually provided to various departments.
Heavy Repairs or Overhaul Cost:
Cost incurred in carrying out major repairs and maintenance may be partly or wholly of capital nature, such as heavy repairs or overhaul costs, the benefit of which is likely to be spread over a period longer than one financial year. This should be separately shown and pointed out. Such expenditure should be treated as deferred revenue or capital expenditure. Repair and maintenance relevant to the current year, and capital or deferred revenue expenditure, the incidence of which is to be spread over a period longer than one financial year, should be properly differentiated.
- Cost accounting record order/rules require that record of all fixed assets, in respect of which depreciation is to be provided, shall be maintained. Depreciation is charged according to the depreciation policy of management, which may be on a straight line or reducing balance method,
based on the useful life of the asset. Any basis adopted should be consistently followed. If any basis, other than the useful life of the asset, is followed, the impact of providing excess or less depreciation should be pointed out.
Provisions of Companies Ordinance Regarding Depreciation:
Provisions of the Companies Ordinance 1984 in regard to depreciation should be kept in view. Clause F of part III of the Fourth Schedule of the Ordinance:
- The amount provided for depreciation, renewals or diminition in the value of fixed assets
- If such provision is not made by means of a charge for depreciation, the method adopted for making such provision shall be disclosed;
- Where such provision is made by means of a charge for depreciation, the value of the assets and the additions or depletions thereto, the depreciation methods and the depreciation rates used for fixed assets under each sub-head of paragraph 1(A) of Part-II of this Schedule shall be disclosed.
- Where no such provision has been made, the reasons for not making it and the amount of depreciation which should have been provided and the quantum of arrears of depreciation, if any, shall be disclosed.
- Overheads is a well defined and well understood term. According to para 8 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, the total amount of overheads should be identified and divided into four categories: factory overheads, administration overheads, selling and distribution overheads and financial charges.
- Reasons for significant variations in the overheads, compared with the previous two years, have to be given in the cost auditors report. Providing item-wise break-up into factory overheads, administration overheads, selling and distribution overheads and of financial charges would go to make the audit report more meaningful. If not all, significant items may be so analyzed.
Allocation of Overheads:
The basis of allocation/apportionment of overhead cost to cost centers should be in accordance with the accepted principles of cost accounting, quantification of services rendered by service departments to cost centers; or on the basis of activities which are cost drivers.