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    Significance Of Maintenance Of Cost Accounting Records And Cost Audit

    Significance of Maintenance of Cost Accounting Records:

    Most of the companies in present day business scenario may be maintaining the cost records only for internal purpose or to comply with the statutory requirements. But maintaining the cost records in formal and systemic manner helps the companies to cater various other needs.

    These cost records help operations management team, promoters, government in making very important decision relating business. Many times, management need cost data to make decisions such as CAPEX, pricing, inventory valuation, cost control etc. Government need costing data to decide on product pricing for critical and important products in the economy, levy anti dumping duties, provide assistance in the form of subsidy etc. Cost data apart from financial data assists regulatory and tax authorities in their departmental audits.

    In this article, we have taken two case studies to analyze the role the cost records play in making right decision.

    Case Study-1:

    A sand manufacturing company, had challenge in meeting customer demands despite having huge installed capacity. In order tounderstand the inability to meet the customer demands, the management has called for cost records maintained at the plant. On a study of cost records, it was understood that the area that required attention was the machine breakdown hours.

    There were many machine breakdown hours and on a detailed inquiry as to why the machine breakdown was happening, it was revealed that, most of the times crusher was struck because of oversize boulders supplied by the mining contractor. It was happening several times in a day and each time boulder is stuck in the crusher, several people required to remove oversize boulder and plant was idle for 30 minutes to several hours.

    After studying the said costing data, management identified that, mining contractor whose responsibility to excavate and transfer the boulder from quarry to plant is culprit in plant breakdowns. The management decided to give incentive if contractor provides supply without oversize boulder. The Contractor deployed an additional person to check the boulder size before loading on to tipper. Then oversize boulder issues were resolved and plant started running more efficiently.

    From the above case study, it is evident that the problem was rightly identified and addressed due to the analysis of machine breakdown hours. If the machine breakdown hours were not captured as a part of maintenance of cost records, then it would be very tough for the management to address the problem in the right time. Hence, the cost records play a vital role and it is the need of the hour to maintain the same in systematic and formal manner.

    Case Study-2:

    A cement industry, had challenge in setting the budget for their plant and machinery maintenance cost because of uneven expenditure spent month on month. There were couple of issues namely the cash flow management and plant performance management.

     

    The company approached a cost accountant to setup the maintenance budget for the plant and machinery. The Consultant has gathered all the cost data relating to plant and machinery such as machine capacity, normal workings hours of each machine and other relevant data to meet the total budgeted quantity output of the company.

     

    Then the consultant has identified all major spares, wear parts of the each machine, gathered data relating to useful life of each component, last change data and number of hours used after last change date etc.

     

    Based on above cost data, consultant has prepared the maintenance budget with more accurate cash flows required each month. It also helped the client to identify more efficient suppliers to procure each component and vendor rating.

     

    The consultant was able to provide such budget sheet with accurate cash flows because of the maintenance of cost records in formal and systematic manner.

     

    From the above case studies, we could understand that maintenance of cost records in formal and systematic manner provides for a ready solution to the various day to day issues. Now, let us understand what forms part of the cost records. The maintenance of cost records would require the following:

    1. Capturing of Information for Once;
    2. Capturing of Information on Regular basis.

     

    Records forming part of Capturing of Information for Once:

     

    1. Product wise process sequence chart.
    2. Process of Manufacture – Description and flow chart.
    3. A list of machinery – production, utilities, services.
    4. Production area – blue print with various machine locations.
    5. A List of cost – centers – production and service.
    6. Machine wise data –
    7. Speed, production rate
    8. Power H.P. (Installed)
    9. Electric motor load factor
    10. Book value and depreciation
    11. Product wise process sequence chart.
    12. Cost centre wise / machine wise workers strength (standard) Category wise.
    13. Dept. wise staff strength (Std.) – grade wise, with pay scale details.

    10. Fringe benefits details – separate for workers and staff.

    1. Marketing:
    2. product –wise sale price,
    3. brokerage and commission,
    4. discount etc.
    5. Technical parameters: product – wise / process – wise / cost centre – wise.
    6. Steam Consumption
    7. Water Consumption
    8. Compressed Air Consumption
    9. Air Conditioning
    10. Other Utilities (Utility – wise)
    11. Raw material requirements: product – wise standard with Waste / Scrap percentages.
    12. Product – wise standard recipe (in quantity)
    13. Colour & Chemicals
    14. Process materials
    15. Packing materials
    16. Export products: separate information, in case, any variation in cost parameters as compared with inland sale products.
    17. Export Incentives – details
    18. Interest cost details: type of loan facilities (Term loan, working capital loan etc.) loan amount, rate of interest, purpose of loan.
    19. Item – wise Budgeted Overhead analysis into –

    - Factory

    - Administration

    - Selling, and

    - Distribution

     

    Records forming part of Capturing of Information on Regular Basis:

     

    1. Production Related Records
    2. Raw material Consumption Records
    3. Production Report
    4. Rejection/Scrap/Wastage Report
    5. Report on stoppage of machine with reasons
    6. Idle time of labour report with reasons
    7. Machine utilization report
    8. Production hours, labour hours and machine hours
    9. Utilities – such as power, water, steam, air conditioning, humidification, ETP etc)
    10. Inputs and outputs Records
    11. Cost centre–wise allocation of outputs and cost
    12. Work – in – progress and finished goods
    13. In Process stock record, cost centre– wise & prod uct– wise
    14. Finished goods stock record, product – wise, pack–wise, type–wise etc
    15. Repairs & maintenance
    16. Works order record/card showing material and spares consumed and labour utilized for repair jobs.
    17. In case of workshop, additional records as described under (i) above
    • Other Service Cost Centers– QC, QA, R & D etc.
    1. of tests carried out, No. of products developed etc.
    2. Basis of cost apportionment and justification for the same
    3. Raw materials, process materials, colour and chemicals, consumable stores and spare parts.
    4. Goods received record.
    5. Bin cards.
    6. Materials/stores ledgers in quantity and value.
    7. Product wise material consumption reports in quantity and value.
    8. Physical stock verification and shortage / excess statement, and reasons for differences.
    9. Wages & Salaries
    10. Attendance record and leave records.
    11. Wages/salary sheets.
    12. Leave wages, bonus gratuity payments and other fringe benefits.
    13. Overtime, idle time etc. records.
    14. Details of VRS, Retrenchment compensation, lay off payment.
    15. Overheads
    16. Overheads analysis record, cost centre–wise.
    17. Sales
    18. Sales analysis by products. (Quality, size, variety –wise) in terms of quantity and value.
    19. Export Sales, product – wise, cou ntry wise.
    20. Product – wise analysis of export incentives and benefits.
    21. Analysis of sales to related parties
    22. Records of inter–company and related party transactions, information about normal price.
    23. Cost accounts/records/statements.
    24. Cost center – wise assets record.
    25. Finished Prod uct– wise moment record.(Quantity reconciliation)
    26. Factory–wise, Product – wise, Pack–wise, Size–wise etc. Cost Statements.
    27. Annexure as per Cost Accounting Records Rules and Cost Audit Report Rules.
    28. Reconciliation of profit/loss as per cost records and financial accounts

    Significance of Cost Audit:

    Ensure that costing system determines the correct and realistic cost of production;

    Provide Production Related information to management;

    Identify the undue wastage or losses;

    Provide economic method of operation to management;

    Reduce cost of operations;

    Control costs through various management techniques such as budgetary control systems; Provide value engineering methods to management for cost reduction;

    Provide cost information to government, which will enable them to take decision such as regulated product pricing such pharmaceutical products, power sugar etc. granting subsidies such as fertilizers, levying anti dumping duties etc.

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