Dr. D. Mukhopadhyay
Cost Audit is a unique product of the cost and management accountancy profession that was invented in India in early 1960s. Cost is the common denominator to measure the performance and efficiency of the factors of production. It became more relevant under the globalized business environment when the competition is the order of the day. It is worth mentioning that Indian products are found to be less competitive in comparison to other countries due to inefficient management of cost not through cost control and cost reduction measures that can be adopted scientifically.
Cost audit is an effective tool for cost management and cost reporting in systematic manner. Unlike financial audit, cost audit is forward looking and diagnostic nature. The scope , relevance and significance of cost audit is not properly understood by Indian business so far and that is genesis of low degree of cost competitiveness of the Indian industry . They think of it as a compliance requirement but in reality it is a boon to the process of the economic resource management. The companies incur high operational cost and as such consequently the industries set high selling price but under the environment of fierce competition, price is determined by market forces. Therefore, Indian products are more costly and dear and cannot compete with those countries which are more efficient in cost management.
Cost audit in India is a statutory audit and the same is being practiced voluntarily in many economically advanced countries because of its valuable utility. The concept and functional modality of cost audit as a cost management tool and Indian experience are found to be in high demand in many countries including our neighboring countries.
The financial audit is an external reporting system for various parties having directly or indirectly interest in the business of a business undertaking. Cost audit on the other hand is used as a powerful guide to the management in the domain of economic resource management. It prevents frauds, errors, misuse of resources and abnormal wastages. It establishes the cost -benefit measuring parameters for project management and it acts as a boon to management of social cost. The ownership of the resources or factors of production remain with the society and thus the society has the right to know the degree of benefit that accrues to it out of the exploitation of such resources. Cost structure of products or services reflect correct and significant operational performance of the business organizations remaining engaged in day to day commercial operations.
The global competitive business environment has called for productivity achievement and meaningful management of the same. Moreover, cost audit covers the behavioral aspects of cost efficiency and cost competitiveness which ultimately lead to organizational efficiency.
The Institute of Cost Accountants of India (ICAI) formerly known as the Institute of Cost and Works Accountants of India(ICWAI), a statutory body created by an Act of the Parliament, is solely responsible for development of cost and management accountancy profession in India and responsible for development of cost accounting standards for effective and efficient management of costs through the mechanism of cost audit.
The most pragmatic means of enhancing cost efficiency and improving organizational competitiveness is obviously a robust cost management system. A firm that is inefficient in resource utilization shall be producing at an unfavorable cost. In order to be cost efficient, every firm therefore is required to establish an adequate control mechanism in its operational system.
Cost audit is one of the effective tool by which a firm can determine its level of efficiency of resource utilization in fraudulent and weak legal system to regularly carry out cost audit. Of late, Government of India has prescribed that a certificate with regard to cost efficiency from practicing CMAs is to be attached with the project proposal under ‘’Make in India’’ scheme and this is a welcome step . But why Indian Industries are not voluntarily adopting cost audit and cost information in monitoring their day to day commercial and manufacturing operations is not clear.
The significant consideration of cost audit in the form performance audit that it assists the management to direct the resources in right channel thereby ensuring optimum return on capital employed. Performance audit investigates whether productivity of labour, raw materials and other inputs are in conformity with national and international standards and the degree of deficiency if any that transpires out of such investigation and examination of implemented plans is correctly reported so that a stitch in time can save nine. Cost audit is also known a profitability audit .
It analyses in minute details as to how each factor of production contributes to the profit or loss the business earns or incurs. On the other hand, cost audit in the form of propriety audit pertains to examination of certain plans and actions taking by the management with regard to finances and expenditure of a business undertaking in order to be sure that such plans are free from fault and actions taken by the management are in the best interest of the organization. Ultimate objective of an organization is to earn optimum return on investment in the form of capital employed. Cost audit in the form of propriety audit ensures that each approved expenditure must bring an optimum benefit measurable in monetary term and the approved plans are in congruence with the organizational goal. Cost audit function as a powerful tool of management control in all sphere of management activity.
It is concerned with examination as to whether efficient utilization economic resources are adequately carried out by the management. Cost competitiveness is the fundamental principle for profitability with regard to a process or product. The gulf between sales and Cost of sales is the profit. Cost of sales is the embodiment of prime cost and overheads including necessary adjustment of work-in-progress and finished goods. Cost is to managed with prudence with the help of available technology. High cost products can hardly fetch good return in the form of profit.
Profitability of a product depends on the productivity of the factors of production and higher the productivity , higher the profitability and otherwise happens in the reverse situation. Profit is the reward for risk borne by the entrepreneurs and no product can sustain without profitability. It is therefore, suggested that cost audit should not be treated as compliance requirement but should be practiced on continuous basis since it is a powerful instrument for developing cost culture and cost efficiency which only can bring about organizational efficiency . Cost management in appropriate manner can make the Indian products cost competitive in the international market. In order to be successful in the domestic and international markets, there is no substitute of cost competitiveness and there is no substitute of cost audit as a dynamic mechanism of nurturing cost culture in the country.
A galaxy of wise men had invented the concept of cost audit in 1960s after having deep understanding of the utility and relevance of cost audit in order to make the Indian industries self reliant and self dependent for having capability of Indian products cost competitive and generating thereby optimum return on capital employed.
Loss gives the birth of capital erosion whereas profit makes it financially viable and sustainable. Government of India should make cost audit a mandatory phenomenon in all kinds of industries including agriculture so that the benefit of the same reaches to every nook and corner of the country. Cost audit is an indispensible tool of expenditure management and operations monitoring and control. India should reap the benefit of continuous cost audit as mechanism of productivity management and ultimately profitability management.
(The author is the Professor of Management, School of Business, Faculty of Management, Shri Mata Vaishno Devi University, Katra)
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