Good corporate governance and financial management are important to enterprises, particularly manufacturing or service-related enterprises, and depend on keeping cost records and enabling cost audits.
Cost records give an overall picture of the cost structure of a company, including labor, materials, overhead, and operating costs. These records help business houses analyze their cost behavior, remedy inefficiencies, set competitive prices for their products, and improve overall profitability. In addition to that, accurate cost data facilitates long-range planning and strategic decision making.
Cost audits play important roles in purposes outside of internal control. As per the Companies Act of 2013, some forms of companies are required to keep cost accounts and conduct cost audits as may be prescribed by the Central Government. Cost audit is an examination of the cost accounts and books in a systematic manner for ascertaining their accuracy and conformity with the legal provisions. It avoids manipulation of costs, adheres to cost accounting standards, and ensures cost reporting transparency.
By keeping cost records and conducting cost audits, firms are not only meeting statutory requirements but also enhancing internal controls, improving stakeholder confidence, and maximising the effective use of resources. An effective cost accounting system is not just used as a compliance tool but as a strategic tool for sustainable development in the competitive and regulated business climate of the present day.
What Are Cost Records?
The term “cost records” refers to an aggregation of systematically organised, detailed files that a company keeps to record, categorise, analyse, and report all cost information relevant to the manufacture of goods or delivery of services.
Raw materials, labor cost, overhead cost, utilities, depreciation, and other operating costs are some of the direct and indirect costs covered by this information. Cost records aim at offering precise information regarding a company’s cost pattern, thus enabling better planning, control, and decision making.
Cost sheets, production reports, inventory statements, work-in-progress journals, overhead allocation schemes, and cost and financial accounts reconciliations are only some of the forms that usual cost records take. Cost records vary from financial accounts records, which are more concerned with overall performance and the state of the finances. Cost records are mostly used by internal management in pursuit of improving operating efficiency, whereas financial accounts are aimed at external users like investors and regulators.
The Indian Central Government can require certain types of companies doing business in specific industries (e.g., manufacturing, mining, or infrastructure) to keep cost accounts in accordance with the Companies (Cost Records and Audit) Rules, 2014 under Section 148 of the Companies Act, 2013. This facilitates improved monitoring and auditing by ensuring that cost data is captured consistently and transparently.
Keeping cost records is both a strategic and legal requirement. It helps companies to realise waste, optimise price strategies, optimally utilise resources, and maximise profitability. Additionally, performing cost audits and generating cost audit reports under a legal mandate is based on the availability of good-quality, maintained cost records.
Applicability Of “Cost Records”
The application of cost records in India is governed by Section 148 of the Companies Act of 2013, amended by the Companies (Cost Records and Audit) Rules of 2014.
These regulations describe the situations in which the companies must have cost records and, in some cases, undertake cost audits. The main aim is to increase transparency in cost reporting, enable improved pricing strategies, and ensure effective management of resources in industries that have substantial economic and social impacts.
The imposition of cost records is not across the board; instead, it is selectively imposed on companies in industries that are deemed crucial to the economy. The law requires reliable and consistent cost records in order to enhance accountability, facilitate policy-making, and allow firms to become more efficient. It acts as both a legal requirement and a strategic management tool, encouraging sustainable business growth.
1. Companies Required to Maintain Cost Records
Certain classes of companies must maintain cost records:
Regulated Sectors (Specified in Table A of the Rules)
These include:
- Telecommunication services
- Electricity generation, transmission, and distribution
- Petroleum products (refining, production)
- Drugs and pharmaceuticals
- Fertilizers
- Sugar
- Railways
Non-Regulated Sectors (Specified in Table B of the Rules)
These include:
- Cement
- Steel
- Aluminium
- Tyres and tubes
- Paper
- Insecticides and pesticides
- Paints and varnishes
- Glass and ceramics
- Textiles
- Machinery and mechanical appliances
- Electricals and electronics
- Food processing and beverages
- Milk powder and dairy products
Companies in these sectors are required to maintain cost records if their overall turnover from all products and services is ₹35 crore or more during the immediately preceding financial year.
2. Type of Companies Included
The coverage includes manufacturing companies, service providers in regulated industries, foreign companies operating in India under Section 2(42) of the Companies Act, and companies having subsidiaries or joint ventures.
However, the following are typically excluded:
- Companies under the definition of micro or small entities under the MSME Act
- Companies involved in job work or captive consumption without commercial sales
3. Form and Standards for Cost Records
To keep cost records, firms must comply with the Cost Accounting Standards (CAS) prescribed by the Institute of Cost Accountants of India (ICAI-CMA). Prepare cost statements, such as cost sheets, reconciliation statements, and product-wise cost details, and maintain cost auditing, internal control, and performance evaluation records.
4. Cost Audit Applicability (Related to Cost Records)
Such companies that fall under the laid-down turnover limits (₹50 crore for Table A and ₹100 crore for Table B) are required to have their cost records audited by a Cost Auditor.
What is Cost Audit?
A cost audit is a systematic review of a company’s cost accounting records and statements to ascertain the accuracy, efficiency, and conformity of cost data with accounting rules and regulatory guidelines.
The process includes checking the proper upkeep of cost records, evaluating the accuracy of cost apportionment, and ensuring that cost statements fairly represent the company’s cost functions.
As opposed to financial audits, which evaluate the overall economic health of an entity, cost audits place greater emphasis on cost effectiveness, control processes, and effectiveness of in-house operations. The primary goal is to pinpoint areas for cost savings, alert against waste or inefficiencies, and have pricing based on accurate cost information.
Cost auditing in India is regulated by Section 148 of the Companies Act of 2013 and the Rules of Companies (Cost Records and Audit) 2014. Some classes of companies in certain regulated and unregulated industries are required to have their cost accounts audited by a Cost Auditor who is a member of the Institute of Cost Accountants of India (ICAI-CMA) and appointed by the company’s Board of Directors with previous approval from the central government.
The cost auditor examines papers like cost sheets, production reports, inventory statements, and reconciliation reports between cost accounts and financial accounts. Subsequently, a Cost Audit Report is submitted in the prescribed form (Form CRA-3), reporting information about cost performance, variations, and suggestions.
In short, cost audits promote transparency, cost control, and strategic decision-making, making them an indispensable tool for companies seeking operational excellence and compliance with regulatory requirements.
Applicability Of Cost Audits
Cost auditing is an important Companies Act of 2013 regulatory mechanism that ensures transparency, cost control, and responsibility among companies engaged in industries that are considered to be of national importance or those that have a large economic impact.
Cost audit is governed under Section 148 of the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules of 2014. The said regulation is applicable only to specific categories of institutions satisfying certain parameters based on industry type, turnover, and business nature.
Cost auditing is not applicable across the board; instead, it is purposely instituted in organizations within key sectors that bear enormous cost implications. Cost audits serve as a good mechanism for organisations as well as for regulatory agencies since they focus on internal efficiency, compliance, and accountability in operations. Organisations within the subject categories should make timely appointments of cost auditors and maintain proper cost records to meet compliance needs as well as derive benefits from judicious cost management.
1. Companies Required to Conduct Cost Audit
Cost audit is applicable only if the company:
- Is required to maintain cost records under Section 148(1) and Rule 3 of the 2014 Rules; and
- Meets specific turnover thresholds as per Rule 4 of the 2014 Rules.
A. Regulated Sectors (Table A of the Rules)
These include:
- Petroleum products (refining, production, transportation)
- Electricity generation, transmission, and distribution
- Drugs and pharmaceuticals
- Telecommunication services
- Fertilizers, sugar, and other notified sectors
Cost audit is applicable if:
- The company’s overall turnover (from all products/services) is ₹50 crore or more, and
- The turnover of the individual product/service under cost audit is ₹25 crore or more.
B. Non-Regulated Sectors (Table B of the Rules)
These include:
- Cement, steel, aluminium
- Tyres and tubes
- Paper and paper products
- Paints and varnishes
- Machinery, textiles, food processing, electronics, etc.
Cost audit is applicable if:
- The company’s overall turnover is ₹100 crore or more, and
- The turnover of the individual product/service under cost audit is ₹35 crore or more.
2. Cost Audit Exemptions
Firms earning more than 75% of their overall revenue from exports are exempted from cost audits.
- Firms set up in Special Economic Zones (SEZs).
- Those firms are categorised as micro or small enterprises under the MSMED Act of 2006.
- Non-principal manufacturers refer to those firms that only undertake job-related work.
3. Appointment and Filing
Cost auditors should be members of the Institute of Cost Accountants of India or the CMA. The cost auditor is appointed by the Board of Directors and approved by the Central Government through CRA-2 form. The Cost Audit Report is required to be filed in Form CRA-3 within 180 days from the end of the financial year.
Purpose and Importance of Cost Records and Cost Audit
Cost accounts and audits are important instruments in improving a company’s financial discipline, operating efficiency, and transparency. The chief aim of cost records is to obtain accurate information about the costs incurred in production, operations, and services. This comprises information on resources, labor, overhead, inventory, and waste, allowing correct product costing, price determination, and performance measurement. Properly kept cost records enable the detection of inefficiencies, efficient utilization of resources, and improved profitability.
Expense audits are necessary because they evaluate the accuracy and dependability of expense reports. A cost audit confirms compliance with cost accounting policies, checks proper record maintenance, and ensures that cost data accurately reflects the company’s functioning. It helps detect errors, fraud, and wastages, and confirms adherence to regulations. In addition, it offers valuable information to management for strategic decision-making and planning.
In India, specific industries, particularly those of public interest or regulated price, are required to have expense accounts and carry out audits as per Section 148 of the Companies Act 2013. Cost records and audits bring about cost transparency and accountability, which further ensures fair competition, policy making, and investor trust. They are not just compliance tools but also effective means to drive corporate excellence and sustainable growth.
Conclusion
The establishment of cost records and audits is strategically necessary to enhance transparency, efficiency, and accountability in industries that hold a substantial economic impact or public interest.
The regulatory environment enables improved cost control, correct pricing, and informed decision-making by forcing companies to keep proper cost records and submit periodic audits.
These practices not only assist companies with maximising their operations, but also support the government policies and safeguard stakeholder interests.
Related Services
