Cost auditors need to pay close attention to the objectives of an organization’s cost audit, ensuring that the cost audit plan is executed efficiently and cost-effectively.

To manage the procedure for a cost audit, the cost auditor should distribute any excess work to their subordinates. Also, to complete the audit properly, the cost auditor must possess detailed knowledge of the organization.

The cost audit program should be designed in such a way that the work can be finished within the minimum period and at the minimum cost.

The main items that a cost auditor focuses on are discussed below.

1. Audit of Materials

The cost auditor should observe the following while auditing materials:

  • Check the materials ledger, ensuring that the correct bin card, note receipt, and issue of material are present.
  • All payments related to materials must be vouched from material receipt vouchers.
  • Check the purchase of materials, receipts, wastage, and return of materials, if any.
  • Evaluate practices for defective and outdated materials.
  • Check whether the cost calculation for the output is made after due note of defective materials.
  • Check whether the materials issue price exceeds the prescribed level.
  • Analyze procedures for purchase and issue.
  • Ensure that there is no misappropriation or theft of materials.

2. Audit of Labor

Cost auditors should note the following points when conducting an audit of labor:

  • Check the work attendance register, supervisor records, and gatekeeper records.
  • When wages are paid according to piece rate, the cost auditor should complete the record of each worker’s output and the same should be vouched from the job card.
  • When the time rate for wage payment is used, the cost auditor should check the procedure for recording overtime (this should be sanctioned by the responsible officer).
  • Check incentive plans for wage payment, if they are used.
  • Verify the total direct cost from labor cost tables.
  • Audit the wages record (its payments are subject to internal audit). The cost auditor should check that the wages record is satisfactory.

3. Audit of Overheads

Overhead refers to the ongoing costs of running a business such as electric bills, gas, coal, rent, and salaries (excluding costs that are directly related to creating or selling a product or service).

The cost auditor should check the distribution of overhead expenses for each department. Alongside this, the following actions should be taken into consideration:

  • Check whether expenditure is desirable from the production and sales perspectives.
  • Ensure that expenses do not exceed the proportionate output.
  • Check whether actual expenditure exceeds standard expenditure.
  • Determine how overheads are allocated on semi-manufactured goods.
  • Consider administration, sales, and capital expenditures.
  • Analyze the budgeted overheads and compare these to the actual overheads, systematically checking for variations.

4. Audit of Plant

Cost auditors should note the following points when auditing a plant:

  • Check plant capacity (i.e., whether full capacity is used).
  • Check the method of depreciation to evaluate whether it is desirable.
  • Calculate the daily plant expenditure.
  • Check the plant’s present position physically.
  • Determine plant sales.

5. Audit of Stock

For stock auditing, cost auditors should consider the following:

  • Check, verify stock, and physically count stock carefully.
  • Check that stock is held in proportion to the expected output.
  • Establish minimum or maximum holdings and order limits.

Frequently Asked Questions

What is the difference between capital expenditure and revenue expenditure?

Capital Expenditures are not related to day-to-day operations. They may have long-term hassles, but they will generally provide additional benefits for the business. Revenue expenditure is incurred by a business in order to generate income or profit.

What is the chart of accounts?

The owner records of the assets, liabilities, and equity of a business is called chart of accounts. In simple terms, the chart of accounts is simply a list of all asset accounts used in your organization. It can also include liability and equity accounts if necessary.

What are the different types of cost?

There are three types of cost-direct, indirect, and period cost. Direct costs can be easily identified with a particular product or service. Indirect costs cannot be easily associated with a particular product or service, but they are related to the overall production process. Period costs are expenses that are not related to the production of a product or service, but they are incurred during a specific period of time.

What is the difference between standard costing and actual costing?

Standard Costing is a method of Cost Accounting that uses predetermined rates to assign indirect costs to products or services. Actual costing is the process of assigning actual direct and indirect costs to products or services.

How is Depreciation accounted for?

Depreciation is a decrease in the value of an asset. There are two types of Depreciation: straight-line and accelerated. Straight-line Depreciation spreads the cost evenly over the useful life of an asset, while accelerated Depreciation assigns more of the cost to earlier years. In accounting, it is treated as an expense that must be paid in order to use an asset.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.