Page 150 - DCOM206_COST_ACCOUNTING_II

Unit 8: Cost Audit

 To examine the planning of expenses so as to ascertain whether possible result Notes
is obtained or not.

(b) Efficiency Audit: It is the test of the efficiency of organisation. This is the valuation of
the executed action. So that it is concluded that the effective efficient implementation
of the predetermined plan has been carried on. It starts with the study of the plan
and extends to the comparison of the actual performance against the budgeted
performance and investigation into the reasons of variables. The main functions of
efficiency audit are:

 To ensure that every investment in capital or other fields gives the optimum
return,

 In matters of work and financial matters, the adjustment has been made in
such a way so that the optimum result is obtained, and
 This audit is related with valuation and examination of profitability so it is
known as performance or profitability audit.

Self Assessment

State whether the following statements are true or false:
4. The statutory cost audit is arranged by customers, business enterprises, government or
special undertakings for some specific objectives.
5. Sometimes, Income tax Tribunals may direct the audit of cost accounts to settle trade
disputes for more wages, bonuses, share in profit, etc.

6. Statutory cost audit means that audit which is arranged to fulfil the provisions of a certain
statute.

7. Propriety audit is the audit of such actions and plans of management which have a bearing
on the finance and expenses of the company or enterprise.



Caselet Do Company Boards need Cost Audit?

Some boards have started looking into the cost audit report, but many do not pay the
deserved attention to cost audit report.
In a recent debate in Forbes magazine in the context of the bankruptcy filing by the
Monitor Group, which was formed by Michel Porter, many viewed ‘sustainable competitive
advantage’ as a mirage in the current business environment. If a company can build
sustainable competitive advantage, it continues to earn above average profit. According
to Porter’s thesis, a company should choose either of the two generic strategies: cost
leadership or differentiation. A company that is cost leader earns a higher margin because
of its cost advantage over competitors. A company that pursues the differentiation strategy
earns a premium for its products and thus earns above average profit. A company that gets
stuck in the middle cannot earn above average profit and may find growth or even survival
difficult. However, Porter does not suggest that a company that peruses differentiation
strategy should not pay attention to cost management.
Contd...

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