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Costing: A new lens of Internal Audit

What is Costing?

A costing of an organisation is an insight into costs, efficiency, productivity, profitability andsustainability of various products/segments of the company for enabling themanagement to assess the performance in the strategic and operationalcontext. The aim would be to discover various drivers of costs and profitabilityand their impact on the performance variables with the objective of helping theorganizations to improve profits and profitability; to optimize resourceallocation and utilization thereof; to optimize the product and servicesportfolio; to monitor performance of the company in various areas; and toknow if company management is meeting its goals.

What is Internal Audit?

Internal Auditing is an independent, assurance, objective and consulting activity that is formulated to add value toand improve a particular organisation‘s operations.

Internal Audit Function: A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness and efficiency of the entity’s operations, risk management, and internal control processes.

Internal audits are considered as a part of the overall system of internal control which gives the management an assurance concerning the control process in the organisation and helps detect inefficiencies or fraud early.

An internal audit is generally conducted with the aim to

  1. Evaluate the effectiveness of internal control
  2. Soundness of the financial system
  3. Efficiency of business processes and so on.

How costing can achieve the objectives of internal audit?

  1. First of all, it will help in deep understanding of the operations, business processes, business environment and information systems of the entity, in order to be able to identify cash flows, alongside the monetary and material flows of the entity.
  2. It will be in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilisation of resources.
  3. It will facilitate calculation of 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 or quarterly or half-yearly or annual basis.
  4. Management gets reliable data for its day-to-day operations like price fixing, control, decision-making, etc., and particularly to evaluation and for improvement in the effectiveness of risk management, Control and governance process.
  5. It can be the value addition for the management operations.
  6. It can be a part of our audit exercise; we check MIS and check the consumption parameters with standards or norms.
  7. We also study the budgets; compare it with actual, try to find effectiveness of internal controls we find out product-wise cost, we also give details of the capacity utilization.
  8. As the physical verification of stock will be done in of internal audit, the reliable check on valuation of closing stock and work-in-progress can be established in it.
  9. Costing can also provide the internal check functions for the operations of management such as-
  10. Reconciliation of expenses and revenues.
  11. Method used for accounting of Inventories.
  12. Goods Receipt Note and Return Note for the material purchased and return.
  13. Employee categorisation, salary and overtime payment analysis statement.
  14. Schemes of retirement benefits of the employees.
  15. Computation of Employee cost.
  16. Engagement letter issued to outside agencies.
  17. Computation of depreciation, its method and policies.
  18. Transportation related bills.    
  19. Standards set for normal loss/spoilage in transit.
  20. Schemes from the government related to subsidies or grants.
  21. Agreement related to contractors and so on.

How costing can be a solution in this pandemic situation?

  • Checking the feasibility of the business model

Considering the market is changing every week (and for the worse), it is imperative to reconsider the business model. This is a crucial time to track current financial metrics and cash flow. As the business key is its production, so as on this time it is crucial to optimise the cost of production and costing will be a chance for that and it will also help in checking the feasibility of business.

  • Tracking expenses against the revenue status

During this contagion, it is of utmost importance for businesses to conduct a proper assessment of their expenses as well as the actual revenues. This strategy can be implemented even when the pandemic effect settles.

So, all the expenses and revenues can be tracked in costing report as it will provide the product wise bifurcation and can help in decision whether that expense is necessary or not.

  • Plan policies for next 3 or 9 months

Since, it is difficult to gauge how long this epidemic will last, it is important to be prepared for all scenarios. If we consider it as a 3-month problem, an instant halt on variable expenditures like hiring, marketing, travel, etc. can help. However, if the crisis continues for 9 months to a year, entrepreneurs will have to reconfigure their business strategy to reduce the variable expenses, renegotiate fixed expenses (rent, salaries, equipment lease payments, etc.), and focus only on the crucial essentials for survival.

So, the costing report will provide the detail view of the expenditures based on which decisions can be taken regarding how much to reduce cost and what should be the percentage so that business remain sustain.

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