Cost Audit

Cost audit is a distinct and specialised form of audit that focuses on the verification of cost records and the cost accounts of a company, as opposed to the financial audit which focuses on the financial statements. Section 148 of the Companies Act 2013, together with the Companies (Cost Records and Audit) Rules 2014, establishes the framework for cost audit in India.

The applicability of cost audit is determined by two factors: first, whether the company falls within a regulated sector or an industry covered by the rules (which includes pharmaceuticals, fertilisers, sugar, steel, cement, petroleum, power generation, mining, and certain other sectors); and second, whether the company's annual turnover exceeds the prescribed threshold — currently set at fifty crore rupees for covered industries in regulated sectors and one hundred crore rupees for other covered industries. Companies meeting both conditions must maintain cost records in the prescribed form and submit them for audit by a cost accountant in practice.

The cost records required under the rules are detailed. They include cost sheets for each product or service, capturing raw material consumption, labour costs, power and fuel, depreciation on manufacturing assets, overhead allocations, and selling and distribution expenses on a per-unit or per-batch basis. This granularity allows the government to monitor whether pricing in regulated sectors reflects genuine cost structures and to detect cases where companies may be cross-subsidising or inflating costs.

For the pharmaceutical sector, cost audit has been particularly relevant given the government's drug price control mechanism administered by the National Pharmaceutical Pricing Authority. NPPA uses cost data from scheduled drug formulations to set ceiling prices, and cost audit records provide a verification mechanism for the cost data submitted by companies.

From an equity analyst's perspective, the cost audit report — which must be filed with the Ministry of Corporate Affairs within a specified deadline — is not publicly available in the same way as the statutory audit report. However, observations by cost auditors about cost control lapses, inefficiencies in resource utilisation, or significant variances between standard and actual costs may surface in due diligence processes. Companies with strong cost management cultures and well-documented cost accounting systems tend to handle cost audit more smoothly and experience fewer regulatory interventions on pricing matters.