Cost audit reveals whether any of the products of the company are making losses. It will help management in taking important decisions because prompt, accurate and reliable information is made available to management with the help of cost audit.
As per ICWA London, “It is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”
Advantages of Cost Audit to the Shareholders –
1. Cost audit ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e wages and overheads, etc. Thus though the company making an overall profit, a loss-making line may eat up the company’s profits. It also makes sure that the industrial unit has been working efficiently and economically.
2. The cost audit enables shareholders to determine whether or not they are getting a fair return on their investments. This is brought to the notice of the shareholders and the management is forced to take remedial measures, thereby making optimum utilization of resources. It reflects managerial efficiency or inefficiency.
3. Cost audit ensures a true picture of the company’s state of affairs. It ensures that the shareholders get a reasonable return on their investments. It reveals whether resources like plant and machinery are being properly utilized or not.
4. Cost audit reveals whether funds invested by shareholders are being profitably used in the business. Thus, shareholders are assured of a fair return on their investment. External cost audit highlights efficiency or inefficiency, utilization of manpower and other resources, adequacy of return, etc.
5. It provides information relating to weak, inefficient or mismanaged units for taking proper corrective action. It also helps to identify the symptoms of sickness in a unit.
6. Cost Audit ensures that proper records are kept as to purchases and utilization of material and expenses incurred on wages, etc.
7. There is a correct valuation of all kinds of inventories. It creates an image of creditworthiness of the concern. This may project a true picture of the organization before shareholders and other investors and help them to assess its performance.
It also makes sure that the valuation of closing stock and work-in-progress is on a fair basis. Thus, the shareholders are assured of a fair return on their investment.
