Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Saturday, May 5, 2012

Maintenance of Statutory Cost Records


Dear Friend,
We feel extremely proud in informing you about the honour bestowed by The Institute of Cost Accountants of India on our professional partners, CA Sandeep Ahuja and CA Surekha Ahuja, by giving them the opportunity to author a Guidance Note on Internal Audit of Cost Records to be published by the Institute. The Guidance Note drafted by our partners will be used as reference material for maintenance and Internal Audit of Cost Records by professionals throughout the country. The said draft is under the perusal of the ICAI and will be published soon after approval.
Through this Newsletter, we bring to you some important statutory notifications and regulations with respect to Maintenance of Statutory Cost Records and the importance of Internal Audit of such Cost Records for companies falling under the purview of the statutory provisions mentioned below.
Why is there a need to maintain Statutory Cost Records?
In exercise of the powers conferred by section 642(1) read with section 209(1)(d) of the Companies Act, 1956, the Central Government has prescribed Cost Accounting Record Rules for the maintenance of cost records for various industries/products. 
Applicability: These rules shall apply to every company, including a foreign company as defined under section 591 of the Companies Act, 1956 which is engaged in the production, processing, manufacturing, or mining activities and wherein:
  • the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or
  • wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or
  • wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.
However, these rules shall not apply in the following cases:
§  a company which is a body corporate governed by any special Act;
§  to the activities or products covered in any of the following rules,-
    1. Cost Accounting Records (Bulk Drugs) Rules, 1974
    2. Cost Accounting Records (Formulations) Rules, 1988
    3. Cost Accounting Records (Fertilizers) Rules, 1993
    4. Cost Accounting Records (Sugar) Rules, 1997
    5. Cost Accounting Records (Industrial Alcohol) Rules, 1997
    6. Cost Accounting Records (Electricity Industry) Rules, 2001
    7. Cost Accounting Records (Petroleum Industry) Rules, 2002
    8. Cost Accounting Records (Telecommunications) Rules, 2002
ü  Every company to which these rules apply, including all units and branches thereof are required to keep cost records in respect of each of its financial year commencing on or after the 1st day of April, 2011.
ü  These Rules also provide for the Compliance Report to be certified by a Cost Accountant.
How to maintain Statutory Cost Records?
The Cost Accounting Record Rules contain particulars relating to utilisation of material or labour or other items of cost as may be prescribed to be included in the books of accounts. The broad categories under which the detailed cost records are required are materials, labour, utilities, overheads, depreciation, royalty/technical know-how, research & development expenses, incentives on exports, interest and other borrowing costs, captive consumption, pollution control, inter-company transaction, etc. These rules also contain various proformae to enable the industry to calculate the cost of production and cost of sales effectively. 
The Cost Accounting Record Rules are sincere efforts to induce the companies to have control over their operations and costs with a view to achieve optimum economics in utilization of resources.
These Rules inculcate a system so that such records are maintained under Generally Accepted Cost Accounting Principles (GACAP) in a systematic way and on a uniform basis among the various companies of an industry. In the absence of any common prescribed Rules, the cost calculated by different companies may not be comparable due to usage of different methods, procedures and practices adopted by various accountants. The Cost Accounting Record Rules form the very basis for compilation of Cost Audit Reports.
What is the applicability of Statutory Cost Audit?
Where in the opinion of the Central Government it is necessary so to do in relation to any company required under clause (d) of sub-section (1) of section 209 to include in its books of account the particulars referred to therein, the Central Government may, by order direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by a cost accountant.
Under section 233B of the Companies Act, 1956, orders are issued for conducting audit of cost accounting records in accordance with the prevailing Cost Audit Report Rules. Prior to the Cost Audit Orders issued on 2nd May, 2011 and 3rd May, 2011, individual orders were being issued to the respective companies for each product covered.
However, Ministry of Corporate Affairs vide F. No. 52/26/CAB-2010 dated 2nd May, 2011 and 3rd May, 2011 has issued industry specific Cost Audit Orders subject to certain conditions of Net Worth/Turnover of companies to which any of the 14 specified Cost Accounting Records Rules contained therein applied. No individual Cost Audit Orders are being issued hence onwards. A Cost Auditor may be appointed for conducting the audit of cost records by the companies covered by orders issued under section 233B of the Companies Act, 1956.
What is the importance of Internal Audit of Cost Records?
Internal Cost audit is viewed as an instrument for ‘continuous improvement’. It is akin to ‘efficiency audit’. Internal Audit of Cost Records aims to provide an assurance to the management and the government that the company is maintaining appropriate cost records as prescribed by law and to identify waste of resources, if any. Thus, it identifies processes and activities where improvements are necessary to optimise the productivity of resources.
The Report of the Internal Cost Auditor provides useful insights into the weaknesses in processes and activities and also provides inputs in formulating plans for continuous improvement in utilisation of resources. 
OUR SERVICES
How can we serve you?
Our Services in Cost and Management Accounting include the following:
1.       Implementing Cost and Management Accounting System for proper maintenance of Statutory Cost Records and efficient management reporting.
2.       Compliance with Cost Accounting Standards and Generally Accepted Cost Accounting Principles.
3.       Compliance with the new cost accounting record notifications from the Ministry of Corporate Affairs.
4.       Setting up systems for better cost management using management accounting tools like Activity Based Cost Management, Balanced Score Cards, Performance Management, etc.
5.       Conducting Internal Audit of Statutory Cost Records to ensure continuous improvement and optimization of resource productivity.
6.       Our team of domain experts is capable enough to provide end to end solutions pertaining to various services such as Product wise/component wise costing profit & loss reports, internal cost audit services, cost records services, legal documentation services, valuation and certification, costing system development, etc.

Designing & Installation of Cost Accounting System
Design and Installation of a Cost Accounting System means each and every element of cost incurred at each stage of production through manpower, machine, material analysis and records is maintained through the mode of written record.
The process flow chart of each and every item produced in the company is seen and records of each and every process of operation through man, machine and material are kept accordingly. Further, on the basis of such exercise, labor hour rate, machine hour rate, material consumption details, etc. are calculated along with the cost incurred at each stage of operation. In this manner, the total cost of all the operations incurred in production of a component is calculated on a monthly basis. Consequently, expenses and overheads incurred at each stage of production are allocated and apportioned to components produced during the period to determine the selling price.
It is to be ensured that the resultant statutory cost records are in compliance with the prescribed Cost Accounting Record Rules, through application of relevant Cost Accounting Standards (CAS) and Generally Accepted Cost Accounting Principles (GACAP).

Product-wise or Component-wise Costing Reports

On the basis of the developed costing system, product wise costing reports are made which include each and every element of cost incurred by the company at each stage of production and also apportionment and allocation of overheads. Preparation of product-wise/component-wise Costing Profit & Loss reports assist in increasing overall profitability of the company. The product-wise costing is calculated on the basis of: 

1) Activity Based Costing
Under Activity-Based Costing (ABC), overhead costs are allocated to products on the basis of the resources consumed in each activity relating to the design, production, and distribution of particular products. Costs are assigned to homogeneous cost pools that represent specific activities. The allocation of these costs to products is accomplished through appropriate cost drivers. Cost drivers are transaction-related and volume-related, which represent the causes of costs incurred in specific activities.

2) Job-wise/Process Costing 
Either a Job-order Cost System or a Process Cost System is used to assign costs to manufactured products for purposes of controlling costs and costing products. A Job-order Cost System accumulates costs of material, labour, and manufacturing overhead expense by specific orders, jobs, batches, or lots. Job-order Cost Systems are widely used in construction, furniture, aircraft, printing, and similar industries where the costs of a specific job depend on the particular order specification. 
Process Cost Systems are used by firms that manufacture products through continuous-flow systems or on a mass-production basis. Industries that use Process Cost Systems include chemicals, petroleum products, textiles, cement, glass, mining, and many others. In a Process Cost System, costs for a department or process are accumulated. Per-unit costs are obtained by dividing the total departmental costs by the quantity produced during a given period in the department or process.
Costing services offered to manufacturing industries
  • Cost determination
  • Ascertainment of waste with reference to norms and past activity
  • Cost optimization
  • Setting up Costing/MIS system and review
  • Product Costing and Pricing
  • Make/Buy decision
  • MIS and Budgeting
  • Designing xls template to act as ready reckoner for sales quote
  • Cost analysis of multi-product/location companies
  • Ascertaining of costs in case of outsourced arrangements on cost plus
Costing services offered to service industries
  • Determining costs of services rendered
  • Ascertainment of interdepartmental service costs
  • Comparative Analysis with past periods and norms

1 comment:

  1. Excellent and very cool idea and great content of different kinds of the valuable information chamunda enterprises

    ReplyDelete