Cost Audit: Planning, Intro, Validation, Value Addition – Detailed

Cost Audit: This article is important because this is the audit for which we cost accountants are known. But, if we really ask ourselves that are we really have practical knowledge of cost audit? Out of 10 only 1 or 2 cost accountants are working in the field of costing? Our purpose must be to give value addition to company/ client rather than only compliance.

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Cost Audit

Cost Audit is even though historical in nature but it has potential of creating cost consciousness and cost competitiveness in the businesses. If we want to compete with china in near future then surely we must have Cost Competitiveness among Indian industry

We need to think on it.

With the help of this article I will try to explain overall procedure in the cost audit. First step in the cost audit is Trial Balance. In fact this is the first and foremost requirement. The next step is you have to bifurcate Finance Heads of expenses into Costing Heads.

For your knowledge followings are the few examples:-

Expenses Finance Head Costing Head
Packing Material Other General Expenses Secondary Packing Cost
Water charges (plant) Other General Expenses Admin
Sales Promotion Expense Other General Expenses Selling & Dist
Postage – Courier Other General Expenses Admin

Above examples is only illustration purpose. Then you have to identify the expenses and incomes which are not form part of cost audit. (Profit Reco)

Incomes not considered in cost accounts: Expenses not considered in cost accounts:
Interest Income Bad trade and other receivables, loans and advances written off
Dividend income from long-term investments Net Loss on foreign currency transactions
Other non-operating income Provision for doubtful trade receivables and advances (net) CSR

You also need to prepare Revenue statement…

In this sheet you have to prepare revenue statement product and service wise. ( it means if company have 3 major product classes and 2 service then sum of all of these.)

MCA has covered the healthcare services under the cost audit wide the companies (Cost Records and Audit) Rules, 2014 dated 30th June 2014. The format for the service cost sheet is very generic for all covered service industries

The requirement of reporting under the annexure to cost audit report is not only to segregate the non-operating incomes and expenses and disclose the Financials vs. Costing Reconciliation. The hospitals have to prepare the cost accounting records based on the Specialty Care wise as mentioned above and in addition to that Hospitals shall prepare the Cost Accounting Records as per the clinical practices viz. Critical care (ICU), Diagnostic services, Radiology and Imaging Services, Emergency Procedure, Operating theatres services, Wards services, Pharmacy, Special procedures-operations, Special treatment rooms, Therapies, Laboratory, Blood bank, Biomedical waste management, Mortuary Management, etc.

Validation :

Total of all above must be match with your Financials You must have quantitative and value wise details of Utilities in respective company. Materials quantitative details and value is also required. (Bifurcate material consumption in to Domestic & Imported)

You also need to calculate VALUE ADDITION statement (which simply means how much company earns and how it utilized the same)

Value Addition:

1 Gross Sales (excluding returns)
2 Less: Excise duty, etc
3 Net Sales
4 Add: Export Incentives
5 Add/Less: Adjustment in Finish Stocks
6 Less: Cost of bought out inputs
(a) Cost of Materials Consumed
(b) Process Materials/Chemicals
(c) Consumption of Stores & Spares
(d) Utilities (e.g. power & fuel)
(e) Others, if any
Total Cost of bought out inputs
7 Value Added
8 Add: Income from any other sources
9 Add:Exceptional,ExtraOrdinary andOtherComprehensive Income, if any
10 Earnings available for distribution

Distribution of Earnings to:

1 Employees like salaries & wages, retirement benefits, etc.
2 Shareholders as dividend
3 Company as retained funds
4 Government as taxes (Specify)
5 Exceptional and Extra Ordinary Expenses, if any
6 Other if any
7 Total distribution of earnings

One important steps in cost audit is to prepare cost sheet product wise. For this take base actual production and sales quantity as per expenses Sales Quantity is basis for below expenses for other actual production qty

Secondary Packing Cost
Selling & Distribution Overheads
Interest & Financing Charges

You need to extract the data of production made in given time period from system.

Other important compliance is Financials Ratios and RPT. For this you can take data from Financials data.


With the help of this data I just tried to give idea about cost audit and what kind of data required for it. Hope you will find this one helpful.


  • Petty Cash Book
  • Pre Audit for payments
  • Accrued Liabilities
  • Step By Step Guide to Tax Audit
  • Audit Program for Vouching
  • Deferred Revenue Expenditure

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