Cost audit as the name suggests is an audit of cost records. It stands for the verification of cost accounts and checks on the adherence to cost accounting plan. It’s objective is to ensure that cost accounts are correct and also to detect errors, frauds and wrong practice in the existing system. It is useful to society as it is often introduced for the purpose of fixation of price.
Advantages of Cost Audit to the Management
- Cost audit helps in the detection of errors and frauds. It acts as an effective managerial tool for the detection of errors, frauds, and irregularities so that reliable and smooth functioning of the system is continued. It can fix the responsibility of an individual wherever irregularities or wastage are found.
- It provides reliable cost data for managerial decisions. The management gets correct and reliable data based on which they can make day-to-day decisions like price fixation. It helps management to regulate production.
- It helps management to regulate production. It helps in cost control and cost reduction. It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision and checking.
- It facilitates cost control and cost reduction. It assists the system of standard costing and budgetary control. It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
- Cost audit ensures effective internal control. It helps the management in inter-unit / firm comparison. It can fix the responsibility of an individual wherever irregularities or wastage are found.
- It enables the management to identify loss-making propositions. It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision and checking or routine procedures and methods.
- It brings more reliability on the costing data and hence can be more effectively used for inter-firm comparison. It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
- Cost audit also enables comparison among different units of the factory in order to find out the profitability of the different units. Analysis of variances is facilitated with cost audit because a comparison of actual with standard production and sales are made.
- It is very useful in public undertakings because it pinpoints the inefficiency of the employees. It exercises moral influence on employees which keeps them efficient and alert.
Cost audit ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry concerned. It ensures maximum utilization of available resources. It helps the management in inter-unit comparison which will be helpful in improving the performance of inefficient units.