Cost audit is, however, a preventive measure. It acts as a check on expenditure. It is a barometer of efficiency of performance. It is also a guide to managerial decisions.

The objectives of cost audit is to ensure the correctness of accounts, records and statements and to prepare a report on the basis of records.

Some of the objectives of cost audit are as follows- 1. Detect the errors and prevent fraud in cost accounts 2. Verification of accuracy of cost accounts 3. To ensure that the company is making optimum use of resources 4. To help in the fixation of prices of goods 5. Creation of New Employment Opportunity and More…

General, Special and Social Objectives of Cost Audit – Explained!

Top 8 Objectives of Cost Audit – Explained! 

Cost audit is, however, a preventive measure. It acts as a check on expenditure. It is a barometer of efficiency of performance. It is also a guide to managerial decisions.

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In the light of this definition and the main features of cost audit, its objectives may be summarised as under:

(a) Verification of the basic cost accounting records with regard to the different elements of cost.

(b) To find out if costs as reflected by the cost accounting records are true and fair.

(c) To verify with the help of technical estimates, what the cost should have been.

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(d) To detect errors and fraud, if any, in the cost accounting records.

(e) To find out if the concern is making optimum use of the available resources in different lines of activity.

(f) To check whether the cost accounting records are in consonance with the cost accounting procedures.

(g) To find out if the existing cost accounting procedures are relevant in the light of developments in the field.

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(h) To assist management in improving operational efficiency and profitability of the undertaking. 


Objectives of Cost Audit – To Ensure the Correctness of Accounts, Records and Statements

The objectives of cost audit is to ensure the correctness of accounts, records and statements and to prepare a report on the basis of records.

The objectives are:

(a) To detect the errors and prevent fraud in cost accounts and misappropriations.

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(b) Verification of accuracy of cost accounts.

(c) To ensure that the costing rules laid down are properly carried out.

(d) Confirm the adequacy of the existing costing system. If not, suggest a better method.

(e) To check whether the existing expenditure gives a good profit or not. 

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(f) Verifying that cost accounts are properly maintained in conformity with accepted cost accounting principles adopted in the industry.

(g) Ensuring that the costing plan laid down, i.e., prescribed costing routine is being carried out.


General and Special Objectives of Cost Audit

The main objectives of cost audit can be divided into two parts as under:

(A) General Objectives:

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The main general objectives of cost audit are as under:

(1) To make an inter-firm comparison.

(2) To inculcate the habits of cost consciousness.

(3) To ensure that the company is making optimum use of resources.

(4) To help in the fixation of prices of goods.

(5) To determine the inventory valuation.

(6) To detect errors and to prevent frauds of various types.

(7) To watch that the costing plan laid down is adhered to.

(8) To verify that the cost accounts have been properly maintained.

(9) To verify the cost of each unit.

(10) To verify that the cost accounts have been periodically reconciled.

(11) To bring in light the abnormal loss of materials and other abnormal loss.

(12) To advise management on other problems like under-utilization of capacity, imbalances in facilities etc.

(B) Special Objectives:

The main social objectives of cost audit are as under:

(1) To create cost consciousness in the society. 

(2) To guard against evasion of tax by correct valuation of inventory.

(3) To help in increasing the productivity.

(4) To ensure about the correctness of cost data for the purpose of cost plus contracts.

(5) To bring in light the weak inefficient and mismanaged companies.

(6) To help and identity the unproductive and product lines.

(7) To help in the fixation of reasonable prices of products.

(8) To provide reliable cost data.


4 Main Objectives of Cost Audit – Protection, Constructive Appraisal, Improved Productivity and Pre-Audit

The main objectives of cost audit are:

1. Protection:

Cost audit protects the business. It ascertains and controls cost by –

(i) Examining the correctness of cost records;

(ii) Detecting errors, undue wastage or losses and ensuring that cost records are compiled accurately; and

(iii) Ascertaining whether the cost accounting plan has been adhered to or not.

2. Constructive Appraisal:

The success of cost audit depends on the outlook of management and scope of cost audit.

The cost auditor provides constructive suggestions based on his findings from cost audit for the benefit of management and shareholders as follows:

(i) Useful information is provided to management for regulating production, selecting economical methods of operation, reducing operations costs and re-formulating plans, etc.

(ii) Suggestions for modification of existing procedure, submission of returns etc., if they are not in conformity with the modern techniques and elimination of unwanted procedures.

(iii) Suggestions for improving the return on capital employed further.

(iv) Information regarding reliability and effectiveness of the existing procedures for taking managerial decisions.

(v) Suggestions for necessary action if the projected expenditure is found inadequate to produce optimum results.

3. Improved Productivity:

Cost audit creates cost consciousness at different levels within the organisation which results in cost reduction and cost control. Moreover, cost audit improves productivity by using efficiently scarce resources, i.e., men, material, machines, etc.

4. Pre-Audit:

Cost auditor checks whether the expenditure has been provided for in the budget estimates and the cumulative expenditure has exceeded the budgeted provisions.


Top 2 Objectives of Cost Audit – General and Social Objectives (With Example)

1. General Objectives:

The following are the general objectives of cost audit:

i) To verify the arithmetical accuracy of Cost Accountancy entries in the books of accounts.

ii) To find out whether cost accounts have been properly maintained according to the principles of costing employed in the industry concerned.

iii) To detect the errors of principles of cost accountancy. 

iv) To detect the frauds that are made in Cost Records, which might have been committed intentionally or otherwise.

v) To verify the total cost of each product, process and job for seeing that they are accurately ascertained.

vi) To help management by pinpointing either deficiency of inefficiencies in the use of man, machine and material.

vii) To find out whether the cost accounting procedures prescribed by the company have been adhered or not.

viii) To verify the adequacy of the books of account and records relating to cost.

ix) To find out whether each item of expenditure involved into the relevant components of the goods manufactured or produced has been properly incurred or not.

x) To value accurately the value of work in progress and closing stock.

xi) To advice the management for the adoption of an alternative course of action by preparing cost plan.

xii) To see whether the chargeable expenses as recorded by the cost accountant of the manufacturer are correct or not.

xiii) To verify that the cost statements are properly drawn up as per the records and that they represent a true and fair view of the cost of production and marketing.

xiv) To see whether the company is adequately managed.

xv) To report to appropriate authority as to the state of cost affairs of the company.

2. Social Objectives:

Cost audit provides valuable information for assessment of the operations with reference to the needs of the society and their fulfillment. To protect the interest of the contributors, to stop capital erosion, production of quality goods at a minimised price, to control the inflationary trend, to provide authentic data for the assessment of direct and indirect taxes, and to help for the improvement of the standard of common people etc., are the examples of the social objects of cost audit.

These objectives can be achieved in the following manner:

i) Application in Agricultural Sector:

The agricultural productivity may be improved if the cost accounting and cost audit is applied in the agricultural field on a wide basis. The introduction of cost accounting system and its audit in agricultural industry may call for availability of agricultural produces at a lower price which may ultimately increase the standard of living of common man of the society.

ii) A Step in the Direction of Consumer Protection:

Our society is constantly reeling under the pressure of inflation. Increase in prices are justified by the industry under the pretext of increases in costs. If increase in prices are only to the extent of increase in costs, then the extent of profits should not be increase. However, we find that profit levels are also increasing which obviously means that increase in prices are more than the increase in costs.

Alternatively, reduction in costs are not passed on to customers. It is only in the cost audit report which reflect increase in costs which can be compared with increase in prices to assess the extent, if any, to which society has been overcharged.

This objective will be more clear by the following observations of the Institute of Cost and Works Accountants of India (ICWAI) “Cost Audit aims at increasing the added value through increased profitability per unit of input or resources. This added value can be shared by all the participants and certainty part of the benefit may reasonably be expected to be passed down to the consumer by way of reduced prices”.

iii) Increasing Productivity:

The cost audit has much role to play in increasing productivity by efficient management of man, material and efficient utilisation of installed capacities of the industries. Ultimately this may bring about an important of existing economic conditions of the common people.

iv) Creation of Cost-Awareness in Business Houses:

The cost auditor can do a lot of creating cost-awareness in connection with the utilisation of available financial resources in a systematic manner, controlling waste, verifying the cost sheet and finally control of material and men.

v) Creation of New Employment Opportunity:

Preparing cost plan in a systematic manner for untapped natural resources. The cost audit may benefit the society for new employment opportunity. It can be possible, if wastage of resources can be minimised and if the new fund created out of proper utilisation of material and men, these efforts can call for new investment opportunity and ultimately creates for new employment opportunity.

vi) Fixation of Price and Price Control:

The increasing rise in prices caused by monopolistic attitude may be controlled by an order of the government to conduct cost audit for those items. 

For example – In 1984, the Monopolies and Restrictive Trade Practices Act (MRTP) has been amended to define ‘Monopolistic Trade Practice’. According to this amendment, any unreasonable increase in profit, price or cost, of any product will be considered as – ‘Monopolistic Trade Practice’ which is not in the interest of the consumer. It is obvious that the cost audit report is the only potential document to reflect such increases on a regular basis.

If the cost structure is properly studied and prices are fixed accordingly it may benefitted to the society in respect of quality and pocket.

vii) Tapping the Uneconomic Product Line:

The cost audit can also provide the society by identifying uneconomic product and thus help the entrepreneur by switch over of those costs to productive line of operation. This may indicate better position of working capital and production of quality items at a minimised price.

viii) Protection Against Evasion of Tax:

Payment of proper tax to the Government falls under the category of social obligation of the business. To meet demands for financing growth plans, taxation is the main source for fund- rising. It may sometime happen that the unscrupulous management evade the payment of taxes through the adoption of certain technique that may result least profit and thereby misappropriates fund.

Ultimately this results loss on national welfare and national development. Under such circumstances the cost audit has much important role to play in showing correct valuation of inventory and in eliminating artificial cost in the computation of cost of production. It affects the reported profit of the business.

For example 

Recognising the significance of the cost auditor’s report the income tax department, while prescribing the annexures to be annexed to the income tax returns of the company insists on a copy of the cost audit report if such an audit is conducted.

This provision is further reinforced by an amendment of Section 139 (a) of the Income Tax Act, 1961 by the Finance Act, 1985. As per the amendment, the Income Tax return submitted by a company will be considered as defective in case it is not accompanied by a copy of the cost audit report when such an audit has been conducted.

ix) Better Utilisation of Alternative Resources:

Generally contributor’s interests are safeguarded through proper rate of return of their investments. But it was found that the shareholders’ interest does not end when a good dividend is earned by their undertaking. 

The question would naturally arise as to whether it was not possible to earn better profit with the same resources or alternative channeling of the existing resources by better management. Here, the adoption of cost audit system may be of greater benefit in this regard. A good control system is an instrument for achieving management objectives.

x) Promoting Export and Earning Foreign Exchange:

It has been proved that the success of export promotion depends mainly on production of quantity and quality goods. So if the products are competitive in respect of both quality and price, then it would be possible to stand in the foreign market.

Thus, it appears that the cost audit has much role to play in promoting export and earning foreign exchange by its efficient application of suitable methods of analysis. For example –

Particulars of export sales and profitability from export sales, after taking into account expenses of exports, are also available in the cost audit report. The cost audit report giving the profitability or otherwise of exports for the company.

The use of marginal costing technique may call for more profitable line of operation and may also help either to continue or discontinue the uneconomic line of operation.

In this way, Cost Audit protects the interest of the society.

The existences of cost accounts assume importance for two reasons viz.:

i) The structure of cost accounts involves cost analysis of the extent and so tends to bring to light any errors existing in the original material or the analysis thereto.

ii) It is only the light of cost accounts that is reliable valuation of manufacturing of cost, or work-in- progress, can be arrived at for the purpose of the preparation of Balance Sheet.

Hence, the basic objectives of cost audit can be summarised as follows:

i) To find out whether the cost accounts have been properly maintained according to the principles of costing employed in the industry concerned.

ii) To verify that the cost statements are properly drawn up as per the records and that they represent a true and fair view of the cost of production and marketing.

iii) To find out whether each item of expenditure involved into the relevant components of the goods manufactured or produced has been properly incurred or not.

iv) To find out whether the cost accounting procedures prescribed by the management have been adhered or not.

vi) To detect any error or fraud which might have been committed intentionally or otherwise.

v) Cost Auditors are required to see whether the chargeable expenses as recorded by the cost accountant of the manufacturer are correct or not.

vi) To assist in reducing the amount of detail checking by the external auditor where the internal Cost Audit system is in opposition.