Procedure of Cost Audit

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 31, 2023

Cost auditors need to pay close attention to the objectives of an organization's cost audit, ensuring that the cost audit plan is executed efficiently and cost-effectively.

To manage the procedure for a cost audit, the cost auditor should distribute any excess work to their subordinates.

Also, to complete the audit properly, the cost auditor must possess detailed knowledge of the organization.

The cost audit program should be designed in such a way that the work can be finished within the minimum period and at the minimum cost.

The main items that a cost auditor focuses on are discussed below.

1. Audit of Materials

The cost auditor should observe the following while auditing materials:

  • Check the materials ledger, ensuring that the correct bin card, note receipt, and issue of material are present.
  • All payments related to materials must be vouched from material receipt vouchers.
  • Check the purchase of materials, receipts, wastage, and return of materials, if any.
  • Evaluate practices for defective and outdated materials.
  • Check whether the cost calculation for the output is made after due note of defective materials.
  • Check whether the materials issue price exceeds the prescribed level.
  • Analyze procedures for purchase and issue.
  • Ensure that there is no misappropriation or theft of materials.

2. Audit of Labor

Cost auditors should note the following points when conducting an audit of labor:

  • Check the work attendance register, supervisor records, and gatekeeper records.
  • When wages are paid according to piece rate, the cost auditor should complete the record of each worker's output and the same should be vouched from the job card.
  • When the time rate for wage payment is used, the cost auditor should check the procedure for recording overtime (this should be sanctioned by the responsible officer).
  • Verify the total direct cost from labor cost tables.
  • Audit the wages record (its payments are subject to internal audit). The cost auditor should check that the wages record is satisfactory.

3. Audit of Overheads

Overhead refers to the ongoing costs of running a business such as electric bills, gas, coal, rent, and salaries (excluding costs that are directly related to creating or selling a product or service).

The cost auditor should check the distribution of overhead expenses for each department. Alongside this, the following actions should be taken into consideration:

  • Check whether expenditure is desirable from the production and sales perspectives.
  • Ensure that expenses do not exceed the proportionate output.
  • Check whether actual expenditure exceeds standard expenditure.
  • Determine how overheads are allocated on semi-manufactured goods.
  • Analyze the budgeted overheads and compare these to the actual overheads, systematically checking for variations.

4. Audit of Plant

Cost auditors should note the following points when auditing a plant:

  • Check plant capacity (i.e., whether full capacity is used).
  • Check the method of depreciation to evaluate whether it is desirable.
  • Calculate the daily plant expenditure.
  • Check the plant's present position physically.
  • Determine plant sales.

5. Audit of Stock

For stock auditing, cost auditors should consider the following:

  • Check, verify stock, and physically count stock carefully.
  • Check that stock is held in proportion to the expected output.
  • Establish minimum or maximum holdings and order limits.

Procedure of Cost Audit FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.