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Unit 8: Cost Audit

The government has taken the right initiatives and now it is the responsibility of the Notes
boards of companies to take it forward.
Source: http://www.business-standard.com/india/news/asish-k-bhattacharyya-do-company-boards-
need-cost-audit/495060/

8.3 Advantages and Disadvantages of Cost Audit

The following are the main advantages and disadvantages of cost audit to management, cost
accountant, shareholders, tax-payers, government and consumers:

8.3.1 Advantages

The advantages of cost audit are as follows:
(i) It will help management in taking important decisions because prompt, accurate and
reliable information is made available to management with the help of cost audit.
(ii) It will bring more reliability on the costing data and hence can be more effectively used
for inter-firm comparison. Management by exception is possible since cost audit separates
efficient from inefficient operations and fixes individual responsibility for inefficient
operations.
(iii) Cost audit is very useful in public enterprises because it pinpoints the inefficiency of the
employees. Thus, it will help in reducing cost of production of goods produced by such
organisations.
(iv) The existence of cost audit has a great moral influence on the employees, as a result of
which the efficiency is increased.
(v) Cost audit will establish the accuracy of cost ledgers or other accounts and will assist in
prevention of errors and frauds. It will also help to improve cost accounting methods and
techniques to facilitate prompt and reliable information to management.
(vi) Cost audit reports raise the status of cost accountant. Being external, it helps in improving
cost methods and can solve specific problems which ultimately raise the status of cost
department.
(vii) Analysis of variances is facilitated with cost audit because a comparison of actual production
with standard production and sales is made. Hence, the systems of standard costing and
budgetary control will be gainfully applied with the cost audit.
(viii) Cost audit assists the financial auditor because he can safely relay on many important
costing data such as cost of closing stock of raw materials, work-in-progress and finished
goods.
In financial accounts, closing stock is valued at cost or market price, whichever is less. The
actual cost of closing stock can be reliably taken from costing books. In other matters, like
payment of commission, bonus to staff, etc., the data supplied by cost accounts and audited
by cost auditor can be taken as correct by the financial auditor.
(ix) It provides information relating to weak, inefficient or mismanaged units for taking
proper corrective action. It also helps to identify the sickness in a unit.

(x) The government and the trade associations may require cost audit for the purpose of
fixing selling prices to prevent excessive profit making. The government also requires
cost audit to give protection to certain industries in public interest. It contributes to the
betterment of the economy by increasing productivity and performance.

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