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Unit 13: Tax and Cost Audit

(e) Establishing proper overhead rates for absorption of overheads by various units of costs Notes
so that the cost is properly ascertained and there is no significant over or under recovery
of expenses.
(f) Fixation of contract price and the determination of the additional or supplementary charge
that can be raised against customers for alterations, etc.
(g) Improving the quality of cost accounting system by obtaining the audit observations and
suggestions of cost auditor.
Cost Audit on behalf of a Customer: In case of cost plus contracts, often the buyer or the contractee
insists on a cost audit to satisfy himself about the correct ascertainment of cost. More often than
not, the provision, for a cost audit in such a circumstance is put in the relevant contract with the
stipulation that the supplier or the contractor will extend all co-operation to the cost auditor.
The cost of production arrived at for this purpose may differ from the cost of production ascertained
for internal purposes.
Cost Audit on behalf of Government: Sometimes, government is approached with requests for
subsidies, protection, etc. Before taking a decision the government may prefer to have the cost
of production of the product determined on the basis of cost audit to satisfy itself whether the
need is genuine or the industry seeking assistance is generally efficiently run. The government,
of its own also may initiate cost audit, in public interest to establish the fair price of any product.
Cost Audit by Trade Association: Where activities of a trade association include maintenance of
a price of the products manufactured by the member units or where there is pooling or
contribution arrangements, the trade association may require the accuracy of costing information
submitted by the member-units checked. The trade association may seek full information on the
costing system, level of efficiency, utilization of capacity, etc.
Statutory Cost Audit: This is covered by the provisions of Section 233B of the Companies Act.

Apart from the aforesaid types of cost audit, the undernoted circumstances may warrant the
introduction of cost audit:

(a) Price fixation: The need for fixation of retention prices in the case of materials of national
importance, like steel, cement etc. may be useful in knowing the true cost of production.
(b) Cost variation within the industry: Where the cost of production varies significantly
from unit to unit in the same industry, cost audit may be necessary to find the reasons for
such differences.
(c) Inefficient management: Where a factory is run inefficiently and uneconomically,
institution of cost audit may be necessary. It may be particularly useful for the Government
before it takes over any unit.

(d) Tax assessment: Where a duty or tax is levied on products based on cost of production, the
levying authorities may ask for cost audit to determine the correct cost of production.
(e) Trade disputes: Cost audit may be useful in settling trade disputes about claim for higher
wages, bonus, etc.

13.2.2 Advantages of Cost Audit

Cost audit will prove to be useful to the management, society, shareholders and the government.
The advantages are as under:

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