Potential of new costing rules

MOHAN R. LAVI | Updated on June 17, 2011 Published on June 09, 2011

The efficacy of the new cost accounting rules would hinge on whether auditors are able to realise their value-addition possibilities.

The world of accountants comprises those who take a close look at revenues and expenses on the one hand and costs on the other. While financial accountants invariably look at the first two, cost accountants delve into cost accounting and management. One of the statutory obligations of a cost accountant is to prepare a Cost Audit Report as dictated by Section 642 read with clause (d) of sub-section (1) of section 209 of the Companies Act, 1956.

The Government mandated cost audits in about 47 industries over the years. Recently, the Cost Accounting (Audit Report) Rules have been amended to make the coverage more exhaustive.


These rules shall apply to every company, including a foreign company as defined under Section 591 of the Act, which is engaged in the production, processing, manufacturing, or mining activities and wherein, the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees, or the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds Rs 20 crore of rupees, or wherein the company's equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.

Production, processing, manufacturing and mining activities have been separately defined. The omnipresent software and BPO sector could also be covered under processing activities as the definition encompasses obtaining, compiling, recording, maintaining, transmitting, holding or using the information or data or knowledge and executing instructions in memory to perform some transformation and/or computation on the data in the computer's memory.

Though net worth has not been defined in the Rules, it is expected that the formula for net worth used in other legislations would be valid for the Rules.

These Rules would not apply to a company which is a body corporate governed by any special Act and to companies in the business of bulk drugs, formulations, fertilizers, sugar, industrial alcohol, electricity, petroleum and telecommunications for which separate guidelines are in place already.

The operative portion of the Rules is Section 4 which prescribes maintenance of cost accounting rules with effect from April 1, 2011, in such manner so as to make it possible to calculate per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly/quarterly/half-yearly/annual basis.

This would be in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute, in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs with a view to achieve optimum economies in utilisation of resources, all such cost records and cost statements, maintained under these rules shall be reconciled with the audited financial statements for the financial year and these records shall be maintained for a period of eight years.

A Compliance Report has been prescribed which is to be filed within a period of six months from the end of the financial year. Penal provisions conclude the rules.

Issues and Benefits

Cost Audit was introduced more than four decades ago in the era of the licence raj to prevent profiteering and also to monitor and preserve economic resources which were scarce.

There is a school of thought that with the dismantling of the Licence Raj and injection of other liberalisation measures post-1991, the Cost Audit Report Rules have lost their criticality and importance.

There is also a lurking fear that public display of sensitive cost information would be easy meat for competitors to absorb and plan their corporate strategies in the market place. There could also be issues in the manner in which the information as required in the Rules is to be prepared and presented in view of the omnibus coverage to all industries as against chosen ones.

The Institute of Cost and Works Accountants of India (ICWAI) has been pro-active in developing cost accounting standards which would meet the requirements of the rules. The need to cut costs was felt by many entities post the financial crisis and the Rules would provide enough data to the management, cost auditor and shareholders to look at ways to manage costs.

It is expected that the competition would know the macro information that is presented in these Rules so the threat of acquisitions, price-wars and other battles would be marginal if not non-existent. The efficacy of these Rules would hinge on the intent with which management and the auditor takes to these Rules — if they look upon it as a routine drill it would remain just that, if they look forward to it to analyse the data and use it as a value-addition, it would assist their cause further.

(The author is a Bangalore-based chartered accountant.)

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Published on June 09, 2011
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