Cost Audit Program

In this tutorial, we will learn about the cost audit program that should record in the audit manual, and the cost auditor should examine the following points.

A Cost audit program is the detailed plan of auditing work to be performed specifying the procedures to be followed in the verification of each item in the cost statements and giving the estimated time required.

The cost audit procedure and the program recorded in the audit manual, and cost auditor should examine the following points:

Materials:

  • Inventory control size, minimum and maximum stocks, material limits, reorder points, safety stocks, ABC analysis, etc.
  • Perpetual inventory system, physical stock checking, and accounting for differences.
  • While detection and prevention of pilferage or loss of stocks.
  • In the correct valuation of closing stocks and work in progress.
  • The method of pricing the issues, whether they are in reasonable limits, their reports should be examined.
  • Budgetary control for materials and variances from standards should examine for material cost control.
  • Wastage, scrap, spoilage, and defectives, whether they are in reasonable limits, their reports should be examined.
  • Examine how losses of materials in storage and the process accounted for and whether these are satisfactory according to cost auditing principles accepted as authoritative.
  • Check the material issue analysis with particular reference to non-production stock materials issued for non-production activities, including capital jobs.

Labor:

Application of labor cost control factors and devices and optimum utilization of labor by production planning, budgets, standards, performance reports, and study of effective wage policy.

  • Method of selection, appointment, and discharge labor turnover and functioning of the personal department.
  • Labor efficiency and productivity and their comparison with the standards fixed.
  • Idle time and overtime their control and treatment in accounting.
  • Wages policy and method of remuneration whether the system is working satisfactorily to the benefit of the management and the labor.
  • Timekeeping system and correct booking of labor cost about time /job cards.
  • Total wages charged in the cost records reconciled with the full payments paid during the financial year.
  • Check the calculation of incentives or bonuses for direct or indirect workers.
  • Check the amount of previous year\s and deferred payment, if any, and their treatment in cost accounting records.
  • Check the correctness of the analysis of wages and salaries into direct labor costs, indirect labor costs, fees, and salaries allocated to service cost centers/production/process centers/administration overheads, selling and distribution overheads, etc.

Overheads:

  • Allocation, apportionment, and absorption of overheads on sound bases to ensured.
  • Comparison of overhead expenditure to the volume of production.
  • Correct allocation of costs to work in progress.
  • Treatment of items of overheads example, factory rent, interest on capital, discounts, etc. should be examined whether they are treated on sound and accepted principles.
  • Obtain the trial balance of the organization under audit and prepare a list of overhead items covering factory, administration, selling, and distribution, eliminating those items of expenditure, which will not be considered in cost as per the record.
  • Total overheads relating to production, administration, selling, and distribution reconciled with financial accounts.
  • Examine the correctness of classification of overheads according to cost accounting principles.