Definition and Advantages of Cost Audit (Advantages to the Management, Shareholders, Society, and Government)

The important advantages of cost audit are briefly discussed as follows. But first, we need to the definition of cost audit.

Definition of cost audit

Smith and Day in their book ‘Advanced Cost Accountancy’ define it, “the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”

R.W. Dobson Smith and Day, in their book Introduction to Cost Accountancy,’ defines it, “Cost audit is the verification of the correctness of cost accounts and the adherence to the cost accountancy plan.”

Advantages of cost audit

The advantages of cost audit may be classified into four ways. They are

1. Advantages to the management
2. Advantages to the shareholders
3. Advantages to the society
4. Advantages to the government

Advantages of cost audit to the management

1. It provides necessary information for prompt decision decisions.
2. It helps management to regulate production.
3. Errors, omissions, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
4. It reduces the cost of production through plugging loopholes relating to wastage of material labor and overheads.
5. It can fix the responsibility of an individual wherever irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and costing system m particular by constant review, revision, and checking or routine procedures and methods.
7. It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
8. It also enables comparison among different units of the factory in order to find out the profitability of the different units.
9. It exercises a moral influence on employees which keeps them efficient and alert.
10. It ensures that the cost accounts have been maintained in accordance with the principles of costing employed in the industry concerned.
11. Cost audit ensures effective internal control.
12. Surly it increases the overall efficiency of productivity.
13. Inefficiency can be eliminated by suitable corrective actions.
14. It facilitates cost control and cost reduction.
15. It assists in the valuation of stock of materials, works in progress and finished goods,
16. It ensures maximum utilization of available resources.
17. It enables the management to chalk out the future policy on the basis of the report by the cost auditor especially in regard to labor, raw material, plant, etc. to maximize production and reduce the cost of production,
18. It tests the effectiveness of cost control techniques and evaluates their advantages to the enterprise.

Advantages to the Shareholders

1. It ensures that proper records are maintained as to purchases, utilization of materials, and expenses incurred on various items i.e. wages and overheads, etc.
2. It creates an image of the creditworthiness of the concern.

Advantages to the Society

1. It tells the true cost of production. From this, the consumer may know what the market price of the article is fair or not. The consumer is saved from exploitation.
2. It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
3. Since the price increase by the industry is not allowed without justification as an increase in the cost of production, consumers can maintain their standard of living

Advantages to the Government

1. It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
2. It helps to ascertain whether any particular industry should be given a subsidy in order to develop that industry.
3. It provides reliable data to the government for fixing up the selling prices of t various commodities.
4. It helps in fixing contract prices in a cost-plus contract.
5. It determines whether differential pricing within the industry is desirable.
6. It helps the government to take necessary measures to improve the efficiency of sick industrial units.
7. It can reveal the fraudulent intentions of the management.
8. Cost statements may be helpful to authorities in imposing tax or duty at the cc of finished products.
9. It facilitates the settlement of trade disputes of the companies.
10. It imposes an automatic check on inflation.
11. It assists the Tariff Board to consider the extension or removal of protection.

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