State the Advantages and Limitations of Cost Audit.

Advantages and Limitations of Cost Audit.

Cost audit is the verification of correctness of cost accounts and of adherence to cost accounting plans. The primary object of cost audit is to verify whether cost have been ascertained on the basis of cost accounts principles and plans, whether cost records have been properly maintained and whether the cost of production and sales have been properly worked out. It is concerned to serve the interest of the internal management. The advantages of Cost Audit are as follows:

  • Detect and prevent error and fraud.
  • Check wastage’s and minimizes cost.
  • Assists regulation of level of production.
  • Fixes accountability for poor performance.
  • Evaluates comparative profitability of different units.
  • Keep a moral check on the staff.
  • It is a tool of tariff policy on different industrial units.
  • It regulates the prices and profits.
  • It helps in controlling industrial sickness.
  • It helps in quicker settlement of industrial disputes.
  • It helps in guiding the proposed taxes and duties.

The limitations of Cost Audit are as follows:

  • It is an undue interference in the internal operations of the management.
  • It is an expensive and time consuming process because it starts with the purchase of raw material and ends with sale of finished products.
  • It is a verification of accounts of estimated figures only which are invariably different from actual expenses.
  • Cost records serve as an important instrument of facing market competition and the relevant information must be treated as trade secrets.

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