Performing Cost Audit – Important Elements of Cost

Incentive Schemes:

Provisions of the cost audit rules in regard to the Cost Auditor’s report quoted in the foregoing para, requires the cost auditor not only to carry out a fairly comprehensive analysis of all wages and salaries paid to all categories of employees, from the Directors and Chief Executive to workers employed for production, administration, selling and distribution, but also to examine any incentive schemes and the contribution such schemes make to achieving more production, higher productivity and their effect on the cost of production. Added marginal cost may be justified to achieve higher production to meet the public demand.

Comparison with Previous Years:

Total man-days of direct labour available and actually worked, during the year, direct labour cost per unit of production; and average number of workers employed for the year, with explanation for the variances in the direct labour cost per unit of production, should be compared with the previous two years, and necessary comments on the comparison included in the Cost Auditor’s report. Detailed study of employees and employee related costs considerably enlarges the scope of the Cost Auditor’s report.

3. Stores and Spare Parts:

Although para 6 of Appendix III of the Companies (Audit of Cost Accounts) Rules 1998, refers to stores and spare parts kept in stock by the entity, “the expenditure per unit of output on stores etc.” , referred to in para 6(a), is related to repairs and maintenance. Provisions of the applicable cost accounting record orders/rules also refer to consumable stores, the consumption of some or all of which may be identifiable with or chargeable direct to production. The cost auditor should examine and comment upon the system of stores accounting, i.e. recording of receipts, issues and balances, both in quantities and values.

Ageing of Inventory:

Partly to safeguard against any unfavorable change in the import policy, industrial units in Pakistan generally overstock imported stores and spares. The cost auditor, while examining the list of stores and spares, should pay particular attention to the ageing of inventories. He should point out such slow moving items in which there has been no movement over the last twenty four months.

Inventory Valuation Formulas:

The various inventory cost formulas (LIFO, FIFO, NIFO), weighted average cost, base stock, specific identification, latest purchase price have different effect on costing and asset valuation. If an entity follows a formula which is different from the one generally followed by the industry, it should be specially commented upon by the cost auditor in his report. The record keeping should also be examined, which should be on a perpetual inventory system, indicating quantities and values. Inventories are generally an important item of assets and the corporate auditors of financial statements attend to the physical count of inventories. The cost auditor, who takes up the assignment after the financial audit, should take into account the audited inventory records and balances.

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