Cost accounting Audit Report Rules 2011-PSV

recent changes in THE COMPNIES (Cost AUDIT REPORT) Rules, 2011 ~~AN Introduction~~: 

recent changes in THE COMPNIES (Cost AUDIT REPORT) Rules, 2011 ~~ AN Introduction ~~ Ptd by: PSV & Associates, Cost Accountants PH: 96203 00691 (Mob) 2665 0880 (Off)

Contents: 

Contents Presentation by PSV & Associates 2 Firm’s Profile and Services offered. The Companies (Cost Audit report) Rules - Recent Changes Application of the Rules Cost Auditor Time Limit and Authentication Maintenance of records Form of the report Procedure of submission of the report Penalties

Profile of the firm and associates:: 

Profile of the firm and associates: Presentation by PSV & Associates 3 The firm, presently a proprietorship firm, is rendering service since 2006. It has the facility to draw upon the services of experts (who are the Associates of the firm) from the relevant field, as and when required. The works carried out/ being carried out by the firm are : Audit of Stocks & Receivables for Working Capital financing.(Rs.2Crores to Rs.120 Crores ) on behalf of large Banks like Canara Bank, Syndicate Bank, Corporation Bank, UCO Bank etc, Cost Auditors for an MNC & an Indian Company, in Pharma Industry and also for an Engineering manufacturing company with a Turnover of Rs.300 Crores p.a. Successfully devised Costing System for a Company in the field of Fabrication & erection of Industrial sheds (Rs.100 Crore turnover p.a.) Carried out an exercise to validate the level of compliance achieved by the newly introduced ERP system by one of the units of a PSU w.r.t . applicable Cost Accounting Rules. Verification & Certification regarding maintenance of Cost Records as required under Sec.209(1) (d) of Companies Act. Installation of Costing System in an Engineering/ manufacturing company( Rs.200 Crores Turnover) and in an Advertising Company (Rs.50Crores)

Profile of the firm and its associates:: 

Profile of the firm and its associates: Profile of CMA B R PRABHAKAR , presently managing the firm. His brief profile is as follows: He started his career in the Indian Audit and Accounts Department and served in IA&AD, in different capacities for 9 years, (i.e., till 1978) . He is exposed fully to all Govt. procedures, Govt. Audit etc., He served thereafter for 28 years (1978 to 2006) PSUs of repute in various capacities out of which: 6 years as Chief of Finance at Project site of power generation plant (Capital Outlay: Rs.1300 Crores ) of NPCIL, starting from ground breaking stage till commissioning of the plant and finalization of tariff for sale of power to Electricity Board. 10 years as General Manager (Finance) in HAL, a Defence PSU, where major Russian projects were managed (capital outlay of more than Rs. 50,000 Crores ) right from the inception stage till product delivery. Successfully designed MIS for reporting of actual costs incurred to the Board of Directors of HAL periodically. While he was with KEC & NGEF(for12years in all), he was fully responsible for maintenance of cost records and furnishing of data for the entire company, in coordination with all the units, in the prescribed pro- formae for Electric Motors for which COST AUDIT and maintenance of cost records was mandatory. 4 Presentation by PSV & Associates

Profile of the firm and its associates:: 

Profile of the firm and its associates: CMA H V VISHWANATHA is a Senior Partner of the firm. He started his career and served the Indian Audit and Accounts Department (IA&AD), in various capacities for 18 years. He is exposed fully to all Govt. procedures, Govt. Audit etc., During this tenure has audited both the Central and State Government Departments such as Income Tax, Provident Fund Commissioner, Sales tax department, Forest Department, etc., and also Government Companies such as NGEF, Karnataka Power Corporation, GEF, etc. Worked on deputation as Accounts Officer in Karnataka Seeds Corporation Ltd. Thereafter, he has worked in HAL and retired as DGM(Finance) in 2004. The major assignments handled were: Headed the finance function of the division involved in Repair, Overhaul and Maintenance of various types of aircraft (of UK, USA, and French origin) involving procurements and agreement for transfer of technologies. Was totally involved for financial evaluations related to all the activities for indigenous development and manufacture of Advanced Light Helicopter (ALH) from its inception stage till the delivery of the first batch of ALH to GOI. He was an integral part of the team that finalized the pricing structure for supplies to GOI. His exposure includes handling of assignments in a major private sector player in the Aero Space Industry. 5 Presentation by PSV & Associates

Profile of the firm and its associates:: 

Profile of the firm and its associates: Profile of CMA M V SUDARSHAN also a Partner in the Firm. Started his career in Infosys Technologies Ltd., and served the company in various capacities for 14 years, as Controller – Finance. Has handled responsibilities such as - Business Planning, International Finance Operation, Treasury, Running large scale IT Development Product SBU, Designing Costing and Revenue Recognition model as per US-GAAP norms, Direct taxes, Hard core Accounting, Management Assurance, STPI compliances , M&A Due diligences, MIS Designing, etc., Review of commercial aspects of customer contracts. Indirect taxation – Service and VAT taxes. Three years with Aricent Technologies (Holdings) Ltd., KKR (Kohlberg Kravis Roberts &Co.) holding company. Senior Manager – Finance, in-charge for Bangalore Finance Operations, Business Finance and Management assurance. With a team of 20 people managed all the areas of core finance AR, AP, Payroll, Taxation, Internal Audit, Travel Accounts etc., and secretarial matters. My team and myself has fully involved in SAP migration. He has been a visiting faculty in Bangalore Chapter of ICWA and other Business Schools in Bangalore. We also have some more qualified Cost Accountants as Associates of the Firm, in addition to 1 graduate Trainees ( Students of ICWAI) working with the firm. 6 Presentation by PSV & Associates

PowerPoint Presentation: 

Cost Audit Concurrent Audits Investigations Due Diligence Stock audits Cost Accounting record compliance reporting. Compliance KVAT Audit Representation Services Advisory- including on Service Tax and VAT STP & EHTP Issues Service Tax Issues Central Excise and customs Project Finance Corporate Law PE Funding Accounting & Audit Business Advisory & Assurance Corporate Consulting Taxation Internal Audit Risk Assessment SOP Development Operations Audit IS Audit Management Audit Valuations Areas of specialization 7 Presentation by PSV & Associates

Our services wrt Cost Audit: 

Our services wrt Cost Audit Installation of system of Cost Recording where needed Conducting Audit and issuance of Certificate. As a separate activity Review your costing system Provide necessary suggestion in collection and reporting. Bringing costing records in line with GACAP and CAS. Providing any services from time to time. Certifications for captive consumption under CAS4. Authentication of costing records. Issuance of Cost Audit Report to Audit committee and to the Govt. of India 8 Presentation by PSV & Associates

The Companies (Cost Audit Report) Rules, 2011 : 

The Companies (Cost Audit Report) Rules , 2011 The said rules was prescribed MCA (Ministry of Corporate Affairs) New notification published in the official Gazette of India, dated 03.06.2011 and orders issued on May 2 nd and 3 rd, 2011. Order by MCA vide ref. F-52/26/CAB-2010 dated 24.1.2012 issued  for COST AUDIT for all Manufacturing companies under Central Excise tariff chapter mentioned in the order with 100 crores as Turnover and/or under Stock exchange Regulations are covered wef . 2012-13  financial year. For details of the Notifications please visit www.icwai.org or www.mca.gov.in 9 Presentation by PSV & Associates

Application of the Rules - 1: 

Application of the Rules - 1 Every company for which cost Audit had been specifically ordered by GOI or before 02.05.2011. Compulsory annual cost audit for all companies involved in manufacturing of Bulk Drug, Formulations, Fertilizers, Sugar, Industrial Alcohol, Electricity, Petroleum Industry and Telecommunications wherein ( i ) Net worth exceeds Rs. 5 Crores , OR (ii) Aggregate value of the turnover from sale or supply of all products or activities exceeds Rs. 20 Crores , OR (iii) The Company’s equity or debts are listed in any stock exchanges. 10 Presentation by PSV & Associates

Application of the Rules - 2: 

Application of the Rules - 2 C. Compulsory annual cost audit for all companies involved in manufacturing of Cement, Tyres and Tubes, Steel plant, Steel Tubes and Pipes, Paper and Insecticides wherein ( i ) Aggregate value of the turnover from sale or supply of all products or activities exceeds Rs. 100 Crores , OR (ii) The Company’s equity or debts are listed in any stock exchanges. This order will be effective from 01.04.2011 11 Presentation by PSV & Associates

Application of the Rules - 3: 

Application of the Rules - 3 Presentation by PSV & Associates 12 Sl No. Industry Relevant Chapter heading of the Central Excise Tariff Act, 1985 01 Cement Chapter 25, 38 and 68 02 Tyres and Tubes Chapter 40 03 Steel Chapter 72 and 73 04 Paper Chapter 47 and 48 05 Insecticides Chapter 38 06 Glass Chapter 70 07 Paint and Varnishes Chapter 32 08 Aluminium Chapter 76 Note: All intermediate products and articles are also covered under these orders

Application of the Rules – for FY 2012-13: 

Application of the Rules – for FY 2012-13 D. Compulsory annual cost audit for all companies involved in manufacturing of 64 chapters of Central Excise Tariff Act, 1985 ( i ) Aggregate value of the turnover from sale or supply of all products or activities exceeds Rs. 100 Crores , OR (ii) The Company’s equity or debts are listed in any stock exchanges. This order will be effective from 01.04.2012 13 Presentation by PSV & Associates

Application of the Rules – FY 2012-13: 

Application of the Rules – FY 2012-13 Presentation by PSV & Associates 14 Sl No. Industry Relevant Chapter heading of the Central Excise Tariff Act, 1985 01 Jute, Cotton, Silk, woolen or blended fabrics / textiles Chapter 50 to 63 02 Edible oil seeds and oil (including vanaspati ) Chapter 12 & 15 03 Packed food products Chapter 2 to 25 (except CH 5, 6, 14, 23 & 24) 04 Organic & inorganic chemicals Chapter 28,29, 32, 38 & 39 05 Coal & Lignite Chapter 27 06 Mining & Metallurgy of ferrous & non-ferrous metals Chapter 26 and 74 to 83 (except chapter 76 & 77) 07 Plantation products Chapter 8, 9, 21 & 40 08 Engineering machinery (including electric and electronic products) Chapter 84 and 85 Note: All intermediate products and articles are also covered under these orders

Cost Auditor: 

Cost Auditor Either a cost accountant holding valid certificate of practice under the provisions of Institute of Cost Accountants of India, 1959. OR A firm of cost accountants registered with ICAI and whose partners have valid certificate of practice under the provisions of Institute of Cost Accountants of India, 1959. 15 Presentation by PSV & Associates

Time Limit & Authentication: 

Time Limit & Authentication Time limit for submission of the compliance report – with in 90 days from the close of the company financial year (before 30 June 2012 for the current year). Authentication of the Cost Audit Report and its annexure should be approved by the BOD before submitting to the Central Government by the Cost Auditor. The annexure duly audited by the Cost Auditor should be signed by the Secretary and at least one Director. If there is no secretary, the same to be signed by at least two directors. 16 Presentation by PSV & Associates

Maintenance of records: 

Maintenance of records Maintenance of cost records is a pre requisite to conduct the Cost Audit. Every company including all units and branches. To be kept on regular basis to calculate per unit cost of production or cost of operation, cost of sales and margin. For each of its product s and activities On monthly / quarterly / half-yearly / annual basis In accordance with the Generally Accepted Cost Accounting Principles and Cost accounting Standards issued by ICWAI. Variations are to be clearly indicated and explained. To achieve optimum economies in utilizations of resources. To be reconciled with the annual financial audited statements To be kept in good order for eight years. 17 Presentation by PSV & Associates

Form of the report: 

Form of the report FORM – I - General information about the company and the Cost Auditor. - Attachment - Cost Audit Report as per the Companies (Cost Audit Report) Rules, 2011. Form II - Cost Audit Report Annexure to the Cost Audit Report Form III – Performance Appraisal Report 18 Presentation by PSV & Associates

Procedure for submission of Cost Audit Report: 

Procedure for submission of Cost Audit Report Presentation by PSV & Associates 19 The Cost Auditor to submit the report along with his observations and suggestions and annexure to: i ) the Central Government in the prescribed form and ii) a copy to the company Report submitted for each unit and each product or activity comprised in each product group. Duly authenticated by at least two directors and the Cost Auditor. The Cost Auditor shall also furnish performance appraisal report to the Board / Audit Committee in the prescribed form. Cost Auditor to give clarification to the Central Government with in 30 days.

Maintenance of records: 

Maintenance of records Every company including all units and branches. To be kept on regular basis to calculate per unit cost of production or cost of operation, cost of sales and margin. For each of its product s and activities On monthly / quarterly / half-yearly / annual basis In accordance with the Generally Accepted Cost Accounting Principles and Cost accounting Standards issued by ICWAI. Variations are to be clearly indicated and explained. To achieve optimum economies in utilizations of resources. To be reconciled with the annual financial audited statements To be kept in good order for eight years. 20 Presentation by PSV & Associates

Role of the Cost Auditor: 

Role of the Cost Auditor 21 Review prevailing cost records and carry out the gap analysis. Provide recommendation to fill the gap between the Cost Records and Cost Accounting Standards. Bringing costing records in line with GACAP and CAS. Providing necessary suggestion and report formats for collecting and reporting cost data to the management. Conducting Audit and issuance of Certificate. Issuance of certifications for captive consumption under CAS4.

Need for Cost Audit: 

Need for Cost Audit 22 Cost Audit is still more detailed exercise and covers wider areas like review and comment of the Cost Accounting Policy of the company with respect to – a) Identification of cost centers/cost objects and cost drivers. b) Accounting for material cost including packing materials, stores and spares etc., employee cost, utilities and other relevant cost components. c) Accounting, allocation and absorption of overheads d) Accounting for Depreciation/Amortization e) Accounting for by-products/joint-products, scarps, wastage etc. f) Basis for Inventory Valuation, Methodology for valuation of Inter-Unit/Inter Company and Related Party transactions. h) Treatment of abnormal, non-recurring and other non-cost items. ( i ) In case the Company has adopted IFRS, variations (if any) in treatment of cost accounting arising out of adoption of IFRS in Financial Accounting. j) Other relevant cost accounting policy adopted by the Company

Parameters assessed under Cost Audit: 

Parameters assessed under Cost Audit 23 Observations of the Cost Auditor regarding adequacy or otherwise of the Budgetary Control System, if any, followed by the company. Review of following reports for each product group separately Product group reporting Quantitative Information Abridged Cost Statement Operating ratio analysis Profit reconciliation Value addition & distribution of earnings (at company level) Financial position and ration analysis Related party transaction Reconciliation of Indirect Tax

Performance Appraisal Report: 

Performance Appraisal Report 24 Capacity Utilization Analysis Productivity/Efficiency Analysis Utilities/Energy Efficiency Analysis Key-Costs & Contribution Analysis Product/Service Profitability Analysis Market/Customer Profitability Analysis Working Capital & Inventory Management Analysis Manpower Analysis Impact of IFRS on the Cost Structure, Cash-Flows and Profitability Application of Management Accounting Tools

Penalties: 

Penalties Cost accountant – If default is made in complying with the provision punishable with fine up to Rs. five thousand. Company and officers – If default imprisonment up to three years or fine up to Rs. 50,000/- or with both. 25 Presentation by PSV & Associates

CAS 1 - 3: 

CAS 1 - 3 Presentation by PSV & Associates 26 CAS No Title Objective Useful for CAS1 Classification for Cost For preparation of Cost Statements Assessment of excise duty and other taxes, anti-dumping measures, transfer pricing etc. CAS2 Capacity Determination For determination of capacity Proper allocation, apportionment and absorption of cost. CAS3 Overheads For Collection, Allocation, Apportionment and Absorption of overheads Determining Cost of products, services or activities CAS3 (revised) Overheads To bring uniformity and consistency in the principles and methods of determining the Overheads with reasonable accuracy . Determining the Overheads with reasonable accuracy.

CAS 4 & 5 : 

CAS 4 & 5 27 CAS No Title Objective Useful for CAS4 Cost of Production for Captive Consumption To determine the assessable value of excisable goods used for captive consumption. Determining Cost of products, services or activities CAS5 Average (equalized) Cost of Transportation To determine averaged/equalized transportation cost Calculating the amount of deduction from assessable value of excisable goods, freight subsidy, Insurance claim valuation, etc Presentation by PSV & Associates

CAS 6 & 7 : 

CAS 6 & 7 Presentation by PSV & Associates 28 CAS No Title Objective Useful for CAS6 Material Cost To bring uniformity and consistency in the principles and methods of determining the material cost with reasonable accuracy in an economically feasible manner. Applicable to all cost statements which require measurement, assignment,   classification   and presentation of material costs. To be followed in all cost statements requiring assurance including attestation. CAS7 Employee Cost To bring uniformity and consistency in the principles and methods of determining the Employee cost with reasonable accuracy. Applicable to cost statements which require classification, measurement, assignment, presentation and disclosure of Employee cost including those requiring attestation

CAS 8 & 9 : 

CAS 8 & 9 29 CAS No Title Objective Useful for CAS8 Cost of Utilities To bring uniformity and consistency in the principles and methods of determining the Cost of Utilities with reasonable accuracy. Applicable to cost statements which require classification, measurement, assignment, presentation and disclosure of Cost of Utilities including those requiring attestation CAS9 Packing Material Cost To bring uniformity and consistency in the principles and methods of determining the Packing Material Cost with reasonable accuracy. Applicable to cost statements which require classification, measurement, assignment, presentation and disclosure of Packing Material Cost including those requiring attestation Presentation by PSV & Associates

CAS 10 & 11 : 

CAS 10 & 11 30 CAS No Title Objective Useful for CAS10 Direct Expenses To bring uniformity and consistency in the principles and methods of determining the Direct Expenses with reasonable accuracy. Applicable to cost statements which require classification, measurement, assignment, presentation and disclosure of Direct Expenses including those requiring attestation CAS11 Administrative Overheads To bring uniformity and consistency in the principles and methods of determining the Administrative Overheads with reasonable accuracy. Applicable to cost statements which require classification, measurement, assignment, presentation and disclosure of Administrative Overheads including those requiring attestation Presentation by PSV & Associates

CAS 12 & 13 : 

CAS 12 & 13 31 CAS No Title Objective Useful for CAS12 Repairs And Maintenance Cost To bring uniformity and consistency in the principles and methods of determining the Repairs and Maintenance Cost with reasonable accuracy. Applicable to cost statements which require classification, measurement, assignment, presentation and disclosure of Repairs and Maintenance Cost including those requiring attestation CAS13 Cost of Service Cost Centre To bring uniformity and consistency in the principles and methods of determining the Cost of Service Cost Centre with reasonable accuracy. Applicable to the preparation and presentation of cost statements, which require classification, measurement and assignment of Cost of Service Cost Centre, including those requiring attestation Presentation by PSV & Associates

GACAP – Generally Accepted Cost Accounting Principles - Objective: 

GACAP – Generally Accepted Cost Accounting Principles - Objective 32 to narrow down diversities in cost accounting practices facilitating the process of development of cost accounting standards; to provide a reference source to industry and practitioners in preparation and attestation of Cost Statements, where specific cost accounting standards are yet to be issued; to provide a reference source to all the stakeholders in the understanding and interpreting the cost statement; to provide a base for monitoring the evolution of new concepts and practices in cost accounting and to codify them as and when they become generally accepted; Presentation by PSV & Associates

GACAP – Conceptual Framework: 

GACAP – Conceptual Framework 33 Focus on drivers of cost, revenue, profit and value. Cost for a purpose. Reality driven Materiality and cost effectiveness. Comparability and consistency Presentation by PSV & Associates

GACAP – Elements of cost: 

GACAP – Elements of cost Presentation by PSV & Associates 34 Material Cost Administration Overhead Employee Cost Selling and Distribution Overhead Direct Expenses Interest and Finance Charges Utilities Sales Repairs and Maintenance Joint Costs Production Overhead Common costs Depreciation Presentation and disclosure

PowerPoint Presentation: 

Substantial reduction in time taken in various report generation eg . Product vise cost and profitability Alternative utilization of various resources to the more profitable products. Timely action and response on various activities Helps very much in pricing. Helps in measuring inter unit performance measure. Benefits of the exercise – some practical examples Improved efficiency and response time Revenue Maximization Cost Control Allocation of resources based on the profitability would result in not only increase in revenue but also profit. Adequate segregation of cost viz – fixed and variable will enable to management to control cost effectively. Savings in operating costs with effective process of planning and monitoring (trend analysis and budget monitoring)

Thank you: 

Thank you 36 Presentation by PSV & Associates Ptd by PSV & Associates , Cost Accountants # 116A, 42 th Cross, 2 nd Main, 8 th Block Jayanagar Bangalore - 560082 PH: 96203 00691 (Mob) 2642 6870 (Off) Email – cma.psvassociates@gmail.com