Cost Records and Cost Audit

Meaning of Cost Records

Cost record means books of account relating to the utilization of labor, materials, and other items of cost as applicable to the production of the goods or services as provided by section 148 of the Companies Act and the Companies (Cost Records and Audit) Rules.

The Companies (Cost Records and Audit) Rules, 2014 as amended on (Rule 3)

Application of cost records

  1. The MCA has introduced six major regulated sectors which are:
    • Telecommunication Services,
    • Generation, distribution, and regulation of Electricity,
    • Petroleum industry,
    • Drugs and Pharmaceuticals,
    • Fertilizers, and
    • Sugar & Industrial Alcohol).
  2. Other than the regulated sectors, the ministry has also named some Non-regulated sectors that should be included in new audit rules. 

The major industries in the Non-regulated sector are:

  • Arms and Ammunitions,
  • Turbojets,
  • Steel,
  • Aeronautics, and
  • Coffee and Tea, etc.
  • Others 

Records are to be maintained under this rule only if the overall turnover from all of its products and services equal to or exceed Rs. Thirty-five Crores in the preceding financial year.

Applicability for Cost Audit

FOR REGULATED SECTORS 

Cost records of every company shall be audited under these rules if the

  • Annual turnover (overall) of the company from all its services and products during the immediately preceding financial year is
  • rupees 50 crores or more
  • and the aggregate turnover
  • of the individual service and product.
  • under rule 3 -for which cost records are required to be maintained 
  • is rupees 25 crores or more.

FOR UNREGULATED SECTORS

Cost records of every company shall be audited under these rules if the

  • Annual turnover (overall) of the company from all its services and products  during the Immediately preceding financial year is
  • rupees 100 crores or more
  • and the aggregate turnover
  • of the individual product or services
  • under rule 3 for which cost records are required to be maintained 
  • is rupees thirty-five crore or more.

The cost audit rules shall not apply to a company 

  • revenue from exports exceeds 75 percent of its total revenue; or
  • operating from a special economic zone area (SEZ)

Rule 5 – the Companies (cost records and audit) Rules, 2014

Every company under these rules

  • including all units and branches thereof,
  • cost records shall be maintained in form CRA -1
  • The cost records shall be maintained regularly
  • in such manner as to facilitate calculation of
  • per unit cost of production
  • or cost of operations,
  • Cost of sales and
  • Margin

for each of its services and products for every financial year on a monthly or quarterly or half-yearly or annual basis.

 The cost records shall be maintained in such manner as to enable the company to exercise control over various operations and costs to achieve optimum economies in the utilization of resources and these records shall also provide necessary data that is required to be furnished under these rules.

Procedure for appointment and fixation of remuneration of the Cost

Auditor Companies (Audit and Auditors) Rules, 2014.

The case I: The Company is required to establish an audit committee

  • The Board shall appoint the cost auditor on the recommendations of the Audit Committee.
  • The Audit Committee shall recommend the remuneration of the cost auditor.
  • The remuneration of the cost auditor shall be considered and approved by the Board and ratified subsequently by the members.

Case II: The Company is not required to establish an audit committee

  • The Board shall appoint the cost auditor.
  • The remuneration of the cost auditor shall be fixed by the Board and ratified subsequently by the members.
  • Only a cost accountant in practice or a firm of cost accountants in practice can be appointed as a cost auditor

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