Dear Friend,
We feel extremely proud in informing you about the
honour bestowed by The Institute of Cost Accountants of India on our
professional partners, CA Sandeep Ahuja and CA Surekha Ahuja, by giving them
the opportunity to author a Guidance Note on Internal Audit of Cost Records to
be published by the Institute. The Guidance Note drafted by our partners will
be used as reference material for maintenance and Internal Audit of Cost
Records by professionals throughout the country. The said draft is under the
perusal of the ICAI and will be published soon after approval.
Through this Newsletter, we bring to you
some important statutory notifications and regulations with respect to
Maintenance of Statutory Cost Records and the importance of Internal Audit of
such Cost Records for companies falling under the purview of the statutory
provisions mentioned below.
Why is there a need to maintain Statutory Cost Records?
In
exercise of the powers conferred by section 642(1) read with section 209(1)(d)
of the Companies Act, 1956, the Central Government has prescribed Cost
Accounting Record Rules for the maintenance of cost records for various
industries/products.
Applicability: These rules shall apply to every company, including a
foreign company as defined under section 591 of the
Companies Act, 1956 which is engaged in the production, processing,
manufacturing, or mining activities and wherein:
- the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds
five crores of rupees; or
- wherein the aggregate value of the turnover made by the company from sale or supply of all products or
activities during the immediately preceding financial year exceeds
twenty crores of rupees; or
- wherein the company’s equity or
debt securities are listed
or are in the process of listing on any stock exchange, whether in India or
outside India.
However, these
rules shall not apply in the following cases:
§ a company which is a body corporate
governed by any special Act;
§ to the activities or products covered
in any of the following rules,-
- Cost Accounting Records (Bulk Drugs) Rules, 1974
- Cost Accounting Records (Formulations) Rules, 1988
- Cost Accounting Records (Fertilizers) Rules, 1993
- Cost Accounting Records (Sugar) Rules, 1997
- Cost Accounting Records (Industrial Alcohol) Rules, 1997
- Cost Accounting Records (Electricity Industry) Rules, 2001
- Cost Accounting Records (Petroleum Industry) Rules, 2002
- Cost Accounting Records (Telecommunications) Rules, 2002
ü Every company to
which these rules apply, including all units and branches thereof are required
to keep cost records in respect of each of its financial year commencing on or
after the 1st day of April, 2011.
ü
These Rules also provide for the Compliance Report to be
certified by a Cost Accountant.
How to maintain
Statutory Cost Records?
The Cost Accounting Record Rules contain particulars relating
to utilisation of material or labour or other items of cost as may be
prescribed to be included in the books of accounts. The
broad categories under which the detailed cost records are required are
materials, labour, utilities, overheads, depreciation, royalty/technical
know-how, research & development expenses, incentives on exports, interest
and other borrowing costs, captive consumption, pollution control, inter-company
transaction, etc. These rules also contain various proformae to
enable the industry to calculate the cost of production and cost of sales
effectively.
The Cost Accounting Record Rules are sincere efforts to
induce the companies to have control over their operations and costs with a
view to achieve optimum economics in utilization of resources.
These Rules inculcate a system so that such records are
maintained under Generally
Accepted Cost Accounting Principles (GACAP) in a
systematic way and on a uniform basis among the various companies of an
industry. In the absence of any common prescribed Rules, the cost calculated by
different companies may not be comparable due to usage of different methods,
procedures and practices adopted by various accountants. The Cost Accounting
Record Rules form the very basis for compilation of Cost Audit Reports.
What is the applicability of Statutory
Cost Audit?
Where in the opinion of the Central Government it is necessary
so to do in relation to any company required under clause (d) of sub-section
(1) of section 209 to include in its books of account the particulars referred
to therein, the Central Government may, by order direct that an audit of cost
accounts of the company shall be conducted in such manner as may be specified
in the order by a cost accountant.
Under section 233B of the Companies Act, 1956, orders are issued
for conducting audit of cost accounting records in accordance with the
prevailing Cost Audit Report Rules. Prior to the Cost Audit Orders issued on
2nd May, 2011 and 3rd May, 2011, individual orders were being issued to the
respective companies for each product covered.
However, Ministry of Corporate Affairs vide F. No.
52/26/CAB-2010 dated 2nd May, 2011 and 3rd May, 2011 has issued
industry specific Cost Audit Orders subject to certain conditions of Net
Worth/Turnover of companies to which any of the 14 specified Cost Accounting
Records Rules contained therein applied. No individual Cost Audit Orders are
being issued hence onwards. A Cost Auditor may be appointed for conducting the
audit of cost records by the companies covered by orders issued under section
233B of the Companies Act, 1956.
What is the
importance of Internal Audit of Cost Records?
Internal Cost audit is
viewed as an instrument for ‘continuous improvement’. It is akin to
‘efficiency audit’. Internal Audit of Cost Records aims to provide an assurance
to the management and the government that the company is maintaining
appropriate cost records as prescribed by law and to identify waste of
resources, if any. Thus, it identifies processes and activities where improvements are necessary to
optimise the productivity of resources.
The Report of the
Internal Cost Auditor provides useful insights into the weaknesses in processes
and activities and also provides inputs in formulating plans for continuous
improvement in utilisation of resources.
OUR SERVICES
How can we
serve you?
Our Services in Cost
and Management Accounting include the following:
1.
Implementing Cost and Management
Accounting System for proper maintenance of Statutory
Cost Records and efficient management reporting.
2.
Compliance with Cost Accounting
Standards and Generally Accepted Cost Accounting Principles.
3.
Compliance with the new cost
accounting record notifications from the Ministry of Corporate
Affairs.
4.
Setting up systems
for better cost management using management accounting tools like Activity Based
Cost Management, Balanced Score Cards, Performance Management,
etc.
5.
Conducting Internal Audit
of Statutory Cost Records to ensure continuous improvement and
optimization of resource productivity.
6.
Our team of domain experts is capable
enough to provide end to end solutions pertaining to various services such as Product wise/component wise costing profit
& loss reports, internal cost audit services, cost records services, legal
documentation services, valuation and certification, costing system development, etc.
Designing &
Installation of Cost Accounting System
Design and Installation of a Cost Accounting System means
each and every
element of cost incurred at each stage of production through manpower, machine,
material analysis and records is maintained through the mode of written record.
The process flow chart of each and every item
produced in the company is seen and records of each and every process of
operation through man, machine and material are kept accordingly. Further, on
the basis of such exercise, labor hour rate, machine hour rate, material
consumption details, etc. are calculated along with the cost
incurred at each stage of operation. In this manner, the total cost of all the
operations incurred in production of a component is calculated on a monthly
basis. Consequently, expenses and overheads incurred at each stage of
production are allocated and apportioned to components produced during the
period to determine the selling price.
It is to be ensured that the resultant statutory cost records
are in compliance with the prescribed Cost Accounting Record Rules, through
application of relevant Cost Accounting Standards (CAS) and Generally Accepted
Cost Accounting Principles (GACAP).
Product-wise or
Component-wise Costing Reports
On the basis of the developed costing system, product wise costing
reports are made which include each and every element of cost incurred by the
company at each stage of production and also apportionment and allocation of
overheads. Preparation of product-wise/component-wise Costing Profit & Loss
reports assist in increasing overall profitability of the company. The product-wise
costing is calculated on the basis of:
1) Activity Based Costing
1) Activity Based Costing
Under Activity-Based Costing (ABC), overhead costs are allocated to
products on the basis of the resources consumed in each activity relating to
the design, production, and distribution of particular products. Costs are
assigned to homogeneous cost pools that represent specific activities. The
allocation of these costs to products is accomplished through appropriate cost
drivers. Cost drivers are transaction-related and volume-related, which
represent the causes of costs incurred in specific activities.
2) Job-wise/Process Costing
Either a Job-order Cost System or a Process Cost System is used to
assign costs to manufactured products for purposes of controlling costs and
costing products. A Job-order Cost System accumulates costs of material, labour,
and manufacturing overhead expense by specific orders, jobs, batches, or lots.
Job-order Cost Systems are widely used in construction, furniture, aircraft,
printing, and similar industries where the costs of a specific job depend on
the particular order specification.
Process Cost Systems
are used by firms that manufacture products through continuous-flow systems or
on a mass-production basis. Industries that use Process Cost Systems include
chemicals, petroleum products, textiles, cement, glass, mining, and many
others. In a Process Cost System, costs for a department or process are
accumulated. Per-unit costs are obtained by dividing the total departmental
costs by the quantity produced during a given period in the department or
process.
Costing services
offered to manufacturing industries
- Cost
determination
- Ascertainment
of waste with reference to norms and past activity
- Cost
optimization
- Setting up
Costing/MIS system and review
- Product
Costing and Pricing
- Make/Buy
decision
- MIS and
Budgeting
- Designing
xls template to act as ready reckoner for sales quote
- Cost
analysis of multi-product/location companies
- Ascertaining of costs in case of outsourced arrangements on cost plus
Costing services
offered to service industries
- Determining
costs of services rendered
- Ascertainment of interdepartmental service costs
- Comparative Analysis with past periods and norms
