Cost Audit: Meaning, Objectives and Applicability

A cost audit is the verification of cost accounts and a check on the adherence to the cost accounting plan laid down by a company. Under the Companies Act, 2013, certain companies are required by law to maintain cost records and get those records audited by a cost accountant in practice. The audit does not examine financial statements. Instead, it assesses whether costs have been recorded correctly, whether production and service processes are operating efficiently and whether the company is pricing its outputs in line with actual cost structures.

What does cost audit mean?

Cost audit is an independent examination of the cost records of a company to establish their accuracy and verify that cost accounting principles and procedures have been properly applied. It is governed by Section 148 of the Companies Act, 2013, and the Companies (Cost Records and Audit) Rules, 2014.

Cost records include records relating to raw material consumption, labour costs, overheads, cost of production, cost of sales and cost of services rendered. The auditor checks whether these records reflect the actual costs incurred and whether they match the prescribed format for that industry.

What are the objectives of cost audit?

Cost audit serves three broad purposes: it helps the company management, it protects consumers and the public, and it gives regulators reliable cost data for policy decisions.

For the company

• Detect errors, wastage and inefficiency in production and service delivery
• Verify that cost data being used for pricing, tendering or budgeting is accurate
• Identify areas where costs are being under-recovered or over-recovered
• Provide a basis for comparing actual costs against standard or budgeted costs

For the government and regulators

• Ensure companies in regulated sectors do not overprice their products by inflating costs
• Provide authentic cost data to fix or review statutory selling prices for essential commodities
• Allow the central government to assess the cost structures of industries receiving tax concessions or protection

For consumers

• Act as a check against manufacturers passing on inflated or unjustified costs to buyers
• Support fair pricing in sectors where consumers have limited ability to compare prices

The audit also verifies that the cost statement submitted by the company to the government under the prescribed form CRA-3 is accurate and complete.

Which companies does cost audit apply to?

The Companies (Cost Records and Audit) Rules, 2014 divide industries into two categories for the purpose of cost audit applicability: regulated sectors and non-regulated sectors.

These thresholds apply to the overall annual turnover from all products and services. If a company operates in multiple product lines, only the products covered under the notified industries need to have their costs audited, provided the turnover from those products meets the specified limit.

Who can conduct a cost audit?

A cost audit must be conducted by a cost accountant in practice, meaning a member of the Institute of Cost Accountants of India holding a certificate of practice. A company cannot appoint its own statutory auditor as cost auditor if that auditor holds more than 20% of the company’s shares or has a financial interest that could compromise independence.

The board of directors appoints the cost auditor, and the company must file Form CRA-2 with the Registrar of Companies within 30 days of the appointment or before 180 days of the start of the financial year, whichever is earlier.

Conclusion

Cost audit is not just a compliance requirement. For companies in notified industries, it is a structured way to validate that cost data is reliable and that pricing decisions are grounded in accurate figures. The audit obligation begins the moment a company’s turnover crosses the prescribed threshold, so it is worth setting up a rigorous cost accounting system well before the trigger is reached. For companies managing large volumes of production data across multiple product lines, accounting software that generates cost statements and reconciles them with financial accounts can simplify audit preparation significantly. 

TallyPrime supports cost centre management, cost category tracking and detailed cost reporting, which helps businesses maintain records in a format that a cost auditor can readily examine.