When we say the term ‘cost’ we simply mean the price we are paying for any goods or services. The process of determining cost of a particular activity or work can be termed as ‘costing’. Knowingly or unknowingly ‘costing’ becomes an integral activity of our daily life. E.g. many of us have the habit of keeping records of our day to day expenses. We use to record all our fooding expenses, travelling expenses, fuel expenses, medical expenses etc. In other words, we can say that we are trying to determine our living cost. This is nothing but ‘costing’. Taking our example a little further, what is the object behind the activity of maintaining daily cost & expenses records? In general, we keep the cost records so that we that do a ‘cost control’ and ‘reduction of cost’ wherever it is possible. The more we reduce or cost the more we save and hence we have more amounts left at our disposal and in other way it increases your earnings.
In any business the main object is to earn profit. Now if a business wants to increase its profit it does not always mean that it should increase its selling prices or increase in sales volumes. It may also think of reducing the cost of the products or services it is providing. However, reducing cost may impact the quality of the products and services it is providing. So, the success of cost reduction will only be when the quality of the product and services are not hampered in the process of reduction of cost.
Cost records requirement- Legal requirement: If we need to find out the cost of each product or services we need to keep proper records which are actually called cost records. If we refer the Company’s Act there is no such specific books mentioned that are to be kept by any company. So, each and every company should keep the records in such a manner so that the cost of the product and services could be found out. The Companies (Cost Records and Audit) Amendment Rules, 2014 has specified the items for which Cost Records are to be maintained and the items of cost that are to be included in the process of maintaining Cost Records but it has also not specified any format or manner that is to be followed in the process of maintaining Cost Records. So the manner of keeping the books may keep on changing from company to company but overall the object remains the same and hence the items to be included in the Cost Records are same.
Is it mandatory to maintain cost records? Question might arise whether Cost Records are to be kept mandatorily by Institution and other business organizations. Compulsorily cost records are to be kept by Companies (incorporated under Companies Act) when they reach a particular level of turnover and when they deal in specific products which are mentioned in the Companies (Cost Records and Audit) Amendment Rules, 2014. For other entities it is not mandatory to keep cost records and perform cost audit. But one can keep such records for their own benefits and interest.
When it becomes mandatory to maintain cost records? Now question might arise what is that particular level of turnover which will trigger the responsibility of maintaining cost records. For that we need to refer again the Companies (Cost Records and Audit) Amendment Rules, 2014.
As per sub-section (1) of Section 148 of the Act, the class of companies, including foreign companies defined in clause (42) of Section 2 of the Companies Act, engaged in the production of the goods or providing services, specified in the Table in the Companies (Cost Records and Audit) Amendment Rules, 2014, having an overall turnover from all its products and services of rupees thirty five crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account.
To make the things clear it should be remembered that The Companies (Cost Records and Audit) Amendment Rules, 2014 contains two Tables : Table A and Table B. Table A contains the list of items which are called items from Regulated Sectors as these items are of national importance and important for the public in general and also the Indian economy. Table B are items for which there is no special regulation issued by the Government of India.
Eg. on applicability of Cost Record: Suppose Company ZXY Ltd. has a turnover of Rs.1 Crore in Product A which is mentioned in Table A and Rs. 1 Crore of turnover in Product B which is mentioned in Table B and turnover of Rs.33 Crores in other goods and services which are not mentioned in any of the table mentioned, the company has to maintain Cost Records.
Cost Audit- Provisions & Requirement: The cost records maintained by an entity as per the above mentioned provisions are also required to be audited as per the Companies Act. The audit is done by a ‘Cost Accountant’ in practice qualified from the ‘Institute of Cost Accountants of India’.
As per the Companies (Cost Records and Audit) Amendment Rules, 2014, a company, dealing with the item listed in Table A, shall get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees fifty crores or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is rupees twenty five crores or more.
In case of companies dealing with the items listed in Table B the company shall get its cost records audited in accordance with these rules if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees one hundred crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained under under Table B is rupees thirty five crore or more.
A table citing different situation would help one to understand better which is as follows :
Note: Turnover in Rs. (Crores)
|Situation||Table A Item||Table B Item||Table A + Table B Item||Other Items||Total Operating Revenue||Maintaining of Cost Records||Cost Audit|
|1||7.5||7.5||15||18||33||Not Compulsory||Not Required|
|3||12||13||25||26||51||Mandatory||Audit of Table A Items Only|
|5||25||Nil||25||26||51||Mandatory||Audit of Table A items|
|7||Nil||35||35||65||100||Mandatory||Audit of Table B items compulsory.|
It is also to borne in mind that once Cost Audit is applicable to any Company it has to continue doing the Audit even if the turnover reduces.
This is an outline about the cost records and cost audit. Various other questions which might arise regarding the applicability of Cost Audit, its exemption etc.. We shall try to clarify such doubts in our future blogs.