Examining the manufacturing costs in industrial production is called a cost audit. Such an audit intends to help in evaluating and improving production performance. Cost audit assists to identify the causes of deviations from standards and reveals the hidden losses during production processes. Such an activity not only increases productivity but also prevents inefficiency and wastage of resources. Due to its resourcefulness, it is necessary for cost auditing to be implemented in Pakistan.
To improve the economy, industrial resources must be used to the best of their potential and maximum production must be achieved through the use of minimal resources while maintaining the standards of quality and customer satisfaction. A lack of complete control over costs and resources in industrial production causes financial difficulties for businesses and also affects the consumers.
The effective and accurate costing of goods and services is essential for the right pricing so that a fair price burden can be placed on consumers. Through cost audits, precise information about the cost of production of the manufactured products can be known to stakeholders—most important of whom are the consumers. For the government, this can lead to significant progress in preventing abominable practices such as profiteering.
A cost audit does not necessarily mean that it is an investigative or forensic audit. Rather, it plays an important role in enhancing productivity and meeting the needs of meticulous reporting to the management in business. It helps in identifying shortcomings in resource utilization and taking corrective measures promptly.
Difference Between Financial Audit and Cost Audit
Some people may say that every company is obliged to conduct its own financial audit and also publish its financial accounts regularly, and hence they question the need for a cost audit in such cases. This is somewhat true, but the financial audit focuses only on compliance with the law and the reporting needs of the company’s shareholders.
The purpose of a financial audit is to report on the improvement or fall in shareholders’ wealth. It is not intended to assess the company’s performance concerning production, efficient utilization of resources, and determination of just pricing. It also does not address the issues of hidden costs involved in the processes of production or detects the causes of resource depletion through wastefulness.
Financial audits are performed for the reporting of financial statistics in which balance sheet (financial position) and income statement (profit and loss) are examined to ensure a true and fair view of the financial affairs of the company. In contrast, the cost audit examines and verifies costing reports and cost accounts of the company.
Cost Audits and the Consumers
A cost auditor takes an in-depth look at the basic elements of production cost such as material consumption, labor costs, and other overhead costs and ensures that the cost of production is calculated following the principles of cost accounting. Cost auditors can also verify cost control measures.
When the cost is ascertained correctly, the cost-based pricing will eventually be accurate. With the help of a cost audit, any kind of hidden cost, which can be a major reason for an unreasonable increase in product prices, can be uncovered This will ensure the protection of the consumers’ interests and reduce the additional burden on their income.
Cost Audits and Industries
Pakistan’s industries face global competition. In such cases, it is important to meet the challenge of effective use of factors of production in the best possible way. Doing so is also an important requirement for the economies of developing countries. The survival and development of any industry or economy depend on competitiveness, which is not possible without minimal and optimal use of resources.
On that account, focusing on cost can be very helpful for our industries in meeting the global competitive challenges. Pakistan needs to compete in product quality by exercising proper control over costs and prices so that its industries can achieve stability, long-term growth, and sustainability.
Cost Auditing in Pakistan
The rules and regulations of cost auditing are applicable in some industries in Pakistan. These industries include cement, sugar, oil and ghee, chemical fertilizers, polyester fiber, petroleum refineries, thermal energy, and natural gas. But there is a need for stringent implementation of these rules and regulations.
But at the same time, there is a need to bring all industries under the ambit of cost audit. The government should enact the necessary legislation to ensure that cost audit regulations be implemented across industries. Like financial accounts, the publication of cost accounts and cost audit reports may also be required to provide accurate information about the cost and pricing of products or services to the government and the consumers.
Industrialists also need to realize that their survival in today’s dire economic situation depends on the optimum use of resources and the protection of consumer interests. Following the best cost accounting practices and implementing cost audits are management tools that can help understand operational efficiency and improve the decision-making process. Industrial entrepreneurs can get the following essential benefits through cost audits:
- Cost audits help determine prices adequate to cover all the costs and to ensure reasonable profit margins.
- They help to disclose activities, departments, products, and projects that lead to higher profits or higher losses.
- Cost audits help in lowering the cost by allowing to maintain the inventory items as per production requirements.
- They help in determining the accurate valuation of raw material, in-process products, and finished products.
- They also help to decide whether the various parts used in production will be profitable to manufacture in the factory or to buy from outside.
- Cost audits help the management to focus only on expenses that can be reduced or eliminated.
- They allow you to compare periodic production costs and help in adjusting prices accordingly.
- Cost audits assist in protecting consumer rights, enhancing customer satisfaction, ensuring compliance with the laws, achieving legitimate profits, focusing on long-term business development, and above all, concurrence to social responsibility.
Benefits to the National Economy
In addition to being a barometer of performance, a cost audit is primarily a preventative measure. It plays a leading role in management policy and decision making and benefits the national economy in numerous ways.
- Cost audits ensure optimal utilization of economic resources and prevents them from being wasted.
- They bring economic competition among the industries.
- They prevent the economic exploitation of consumers.
- They reduce the cost of goods and services and plays a pivotal role in controlling inflation.
- They help the government in curbing illicit practices of profiteering.
- They bring stability to economic performance.
- They help bring transparency to the corporate sector.
The Institute of Cost and Management Accountants of Pakistan
Like financial accounting and audit practices, cost accounting or cost audit also requires a professional or specialized area of expertise. In this regard, like the rest of the world, a regular body has been set up in Pakistan to support the industry, which aims to develop cost auditing experts through a rigorous education and training system, following the best international practices and standards.
The institute responsible for this is the Institute of Cost and Management Accountants of Pakistan (ICMA Pakistan); it has branches in all the major cities of Pakistan. The institute provides knowledge and training to the students under a strict education and examination system. Thousands of the pass outs of the institute are serving in the industry to the best of their abilities, knowledge, and skills.
However, to address the prevailing economic challenges, the role of ICMA Pakistan needs to be further strengthened through appropriate legislation by the government of the state. This could be a strong measure to ensure the best use of the country’s economic resources vis-à-vis curbing the factors such as undue price hikes and odious practices of profiteering and cartelization.
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