When and Why Do You Need A Cost Audit?
Cost Audit is a tool which is used for complete verification of an entity’s cost accounts and records. In addition, it also ensures whether an entity is adhering to the cost accounting principles and procedures when maintaining its cost accounts. In other words, the purpose of a cost audit is to ascertain the completeness and accuracy of cost accounting records to ensure that they are in conformity with the cost accounting plans, principles and procedures.
Objectives of a Cost Audit
Cost audits are performed by specialized audit companies. There are several audit firms in Dubai and rest of the UAE who have an amazing track record performing in depth and detailed cost audits. The main objectives of cost audits are as follows:
- To verify that cost records/costing books are complete and accurate;
- To ensure that costing principles and procedures have been completely followed by the entity when maintaining costing books and preparing cost accounts;
- To identify any error and/or fraud, which may have been committed by the entity’s management either intentionally or otherwise during the preparation of the cost accounts;
- To examine whether the existing cost accounting practices of an entity are helping its management in making informed business decisions.
- To identify and disclose inefficiencies or deficiencies with regards to the use of raw material, labor and machinery.
- To identify unwanted expenditures incurred by an entity during the process of manufacturing its products;
- To identify whether an entity is making the best use of resources that are available for each line of activity;
- It provides different government departments with information which can be used by the government in a number of different ways such as making informed decisions regarding price fixation.
- To identify excessive profits made by businesses on products in accordance with the cost accounting rules;
- To exercise check and control over the cost accounting staff or accounting firm providing bookkeeping services in UAE.
Advantages of a Cost Audit
Advantages of conducting a cost audit are as follows:
- It helps in detection of fraud and errors;
- It provides management of entities with reliable and accurate data and information which can be used to make important day-to-day business decisions;
- It helps businesses in cost control as well as cost reduction;
- It helps in facilitating standard costing system as well as budgetary control;
- It helps the senior management when comparing performance of different departments or divisions;
- It helps the management in identifying loss making products, projects, divisions, departments, etc.
Reasons for Conducting a Cost Audit
There are a number of reasons as to why it is important for a business entity to conduct a cost audit of its cost accounts. Some of those reasons are as follows:
Budgeting is an important tool which helps businesses in setting cost targets which they want to achieve during the course of the upcoming financial period/year. No entity can move towards growth and success without setting proper targets and goals through budgeting. Most companies use cost accounts of previous years together with current market trends and information related to the near future to create budgets for future financial periods/years.
The factors which caused the costs to decrease and increase in previous years (explained in detail in a cost audit report) will help you in setting cost targets for future periods. Hence, it can be said that a cost audit helps an entity in preparing budget plans for its future financial periods.
2) Identifying the Break-Even Point
One of the main reasons behind setting up a business is to earn profit. In order to make profits, it is essential to understand your costs, revenues, and the break-even point which is why an entrepreneurs must have basic accounting skills. It is very difficult for a business to start making profit in its initial days. Initially, the main objective of business entity is to recover all its costs and reach the break-even point. In order to do that it is important to identify the break-even point. A cost audit not only provides you with all the necessary information about all your costs but also helps you in getting a better understanding of these costs which in turn would help you in identifying the break-even point of your business. In addition, you could use this “better understanding” to maintain your costs in some cases and reduce in others. Ultimately, this would help you in recovering all your costs and will put you on the path of making profit and achieving success.
3) Future Strategies
Future planning is one of the most important elements for businesses that want to attain growth and be financially sustainable in the long-term. But before an entity starts planning about the future it is important for it to have complete knowledge and understanding regarding its current financial position and performance. When you have knowledge about all your current costs then it becomes comparatively easy for you to control them.
Therefore, a cost audit helps businesses in keeping track of increasing costs as well as in identifying activities which are no longer profitable. This in turn helps businesses in devising future strategies which if executed properly could result in growth and success in the long-term.
4) Reduce Overhead Costs
Overhead costs of a business are also referred to as indirect costs which include rent, repairs, insurance, and other administrative expenses. Cost audits provide businesses with the opportunity to review and evaluate all these expenses in the light of the audit report findings and also take necessary steps to reduce the said expenses when needed.
5) Pricing of Products
Many companies use the cost audit report findings to change the prices of their products so that adequate profits can be earned.
How Can Push Digits help you with your Cost Audit?
Push Digits Chartered Accountants is one of the top 10 audit firms in UAE. We have a team of highly experienced cost accounting, tax and audit professionals that are sincere and committed towards assisting their clients, at any given time, regarding their needs and queries about cost audits, external audits, internal audits, bookkeeping, tax consultancy, and any other assurance service. We are excited and glad to assist in any type of cost audits that are required to be conducted in your business.