Cost Audit: What Is a Cost Audit
What is a Cost Audit?
A cost audit is an examination of the cost structure of a business. It is mainly conducted to identify variances in costs and to provide an opportunity for making changes that would reduce the overall expenditure.
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Cost audit has no room for mistakes since it entails verifying the correctness of cost records or cost accounts. Cost audit can be a difficult task especially to students who are yet to attain the required experience. But this is not the end, one can get help from professional experts at Gudwriter who offer the best accounting homework help at an affordable price.
It is important whether you are a business owner, an auditor, or someone else who needs a better understanding of how your company’s costs might be affecting your bottom line. A cost audit can help notify you of where risks exist within the office and offer opportunities for reducing these risks by utilizing different resources such as emergency funds.
Goals of Cost Audit
1. Elimination of Frauds and Errors
Cost Audit encompasses a wide area of activities. It involves every aspect of operations, i.e., material control, purchasing, sales, payroll, inventory, and accounts receivable control. The auditor will scrutinize all transactions recorded in the books of account and about physical assets.
The overriding objective is to reduce operating expenses and increase net profits after tax by eliminating frauds or errors in cost accounting systems, such as miscalculations or misclassification of costs and expenses for goods and services.
2. Avoidance of Wastage, Losses, and Inefficiencies
The cost audit procedure helps identify deficiencies and weaknesses in the cost accounting system. It helps to identify losses, waste, and inefficiencies in various departments/functions of a company. Such information is useful for improving performance through more efficient systems, improved methods, or better management policies.
3. Cost Reduction and Productivity Improvement
A cost audit helps the company determine if all costs are utilized fully in production, sales and distribution. The balance of idle resources is necessary for increasing efficiency. This helps to increase productivity, reduce costs and eventually generate greater profits.
4. A Better understanding of the current financial condition
Cost Audit involves the calculation of profit from every source, including the income from the sales, direct costs incurred in the production process, and various charges for interest paid on financial capital, etc. After the audit, a company can assess its financial position better, thereby helping it control its costs.
5. Obtaining estimates of future profitability
Production costs and provision for plant and equipment depreciation are important during the cost audit. These factors will help an investor to estimate future profits over a while.
Advantages of cost audit
The benefits of a cost audit include:
1. It Helps Point Out Any Wastage For the Company
The cost audit helps to find any waste in the company. Wastage can be found in production, raw material usage, misclassification of accounts, and others. The auditor also checks whether the department is working efficiently or not by analyzing the inventory of materials and finished goods.
2. Easy to Understand the Financial Condition of a Company
Cost audit helps to understand a company’s financial condition as it deals with all aspects of a company, such as sales and production, which help to understand where the profits come from.
3. Helps Faster Decision Making and Reduction in Costs
Cost audit helps reduce costs and make more effective decisions by understanding how much money can be generated. The auditors’ report contains suggestions that can help increase efficiency, reduce costs, and avoid losses.
4. Helps to Compare the Cost with Earnings to Get the Best Prescription for Reducing Costs
The financial statements obtained from cost audits are useful in comparing profit from sales with costs incurred. After analyzing the cost, sales, and profit data available, it can be seen where there is a loss in any production area or sales department. Then changes can be made according to the suggestions made by auditors.
Disadvantages of cost audit
Despite the many benefits of a cost audit, it comes with some disadvantages that may include:
1. Cost Audit Takes Time to Calculate
The auditor needs to calculate the details of all transactions and costs to be audited to come up with a reasonable estimate of the company’s costs. It may even take several days or weeks for the auditor to finish it. This delay can seriously affect the performance of the company and its managers.
2. Conducting an Audit is Expensive
Finding an auditor qualified enough to conduct the cost audit is not always easy. An organization usually needs more than one qualified auditor to conduct the audit at different levels of operations. Furthermore, when the audit has been completed, there will also be an additional cost necessary for a company to implement any suggestions given by auditors.
3. Expertise is Required to Record
It is not an easy task to record data about the cost of production and used materials, and other expenses. Certain complicated calculations must be made to ensure that the cost report the auditors provide is correct and reliable.
4. Inaccurate Estimates are Possible
The auditors’ report gives only a general idea of the cost incurred to run a business. It does not. t give an accurate figure for every operation or department. Therefore, it is also possible that there may be some differences in estimates of costs between two different auditors.
Types of cost audit
There are many types of cost audits. They include:
1. Cost Audit on Behalf of Management
This can be done either periodically or at any time when there is a need to know the actual cost of production. The management may also decide to do it if there is a decline in production. It helps the management take decisions more effectively and enables them to reduce losses, find ways to improve productivity and enhance profitability.
2. Cost Audit on Behalf of Customer
When an organization agrees to supply a particular quantity of goods at a specific price, it is called a firm order. A cost audit is conducted on behalf of the customer by auditors, who provide the management with details about how much cost is incurred for supplying the goods.
3. Cost Audit on Behalf of Investors
An audit can be conducted on behalf of investors when they want to find out how much profit they are making on the money they invested in the company. This helps investors to reduce their losses and earn more by finding ways of increasing productivity, reducing costs, and finding ways of increasing profitability.
4. Cost Audit of Accounts
This audit is done on behalf of the organization’s accountants to determine how costs affect the financial statements and to decide which is the best way to record transactions.
5. Circumstantial Cost Audit
A cost audit is also done when a company is involved in litigation and has to provide evidence of its costs. The company may have to prove that it spent a certain amount on buying certain parts or raw materials incorporated into the goods sold to customers.
In the modern era, cost audit plays an important role in ensuring that a corporation accurately allocates its costs. The auditor’s report provides information that can help management better understand its costs and profitability, control its expenses and make better decisions regarding capital investment, production targets, and cost-cutting programs. Cost audit helps to maintain accurate costing records so that the management can get a full picture of the financial position before making any decision regarding cost-cutting or financing programs.