What is Cost Records and Cost Audit Applicability?

Provisions regarding the applicability of cost audits and cost records are mentioned under Section 148 of the Companies Act, 2013. The main features of Section 148 of the Companies Act are listed below:

• Under Section 148(1), the central government has the power to direct companies to mention various utilizations of material, labour and other items in the account books of the company. These companies may be specified in the field of production of goods.
• Under Table A and Table B of Rule 3 of the Companies Rules, 2014, a list of those companies which need to maintain the records of cost is mentioned.
• Under Section 148(2), the central government is provided the power to direct an audit of records of cost of specified companies on the basis of either net worth or the turnover of the company.
• Under Rule 4 of the Companies Rules, 2014, the provisions related to those companies which are liable to audit their cost records are mentioned.
• The cost accountant who is appointed by the Board should perform the cost audit.
• If there is any default on the company’s part, then a fine of an amount of Rs. 25,000 or more will be levied on the company. The maximum amount of fine that can be levied is of Rs. 5 lakhs. Also, every officer of the company who is a part of the default has to face imprisonment of up to 1 year or a fine of Rs. 10000 or more. 
• If the default is on the part of the cost accountant, then he/she will be punished as per Section 147(2) to Section 147(4).

Cost Records

Under Rule 2 (e) of the Companies, the word ‘cost records’ has been defined. According to this definition, cost records are books of accounts which are related to the utilisation of material, labour and other items of costs. These are applicable to the provision of services or goods production as mentioned in Section 148 of the Act and the Companies Rules.

Cost Records Applicability

 Two tables Table A- regulated sectors and Table B- Non-regulated sectors are mentioned under Rule 3 of the Companies Rules, 2014. The companies which are involved in production of goods or provision of service as per Table A and Table B, have to include cost records in the account books of the company. Also, the total turnover of the company from all the services and production during the previous financial year was more than Rs. 35 Crore.

Simply put, the cost records must be maintained in the following situations:

1. The entity has been involved in production of goods or provision of services that have been mentioned in Table A or Table B.
2. The total turnover of the company for the previous financial year exceeds Rs. 35 Crore from all its services or productions.

Cost Audit Applicability

The provisions for the applicability of Cost Audit are mentioned under Rule 4 of the Companies Rules, 2014. As per the rule, the applicability of cost audit is possible in under the following conditions:

1. Goods and Services listed in Table A
   1. The total annual turnover is more than or equal to Rs. 50 Crore from all of its products or services.
   2. The aggregate turnover  is more than or equal to Rs. 25 crore for each product or service for which the maintenance of cost records is required.
2. Goods and Services listed in Table B
   1. The total annual turnover is more than or equal to Rs. 100 Crore of all the services or products.
   2. The aggregate turnover is more than or equal to Rs. 35 Crore from each product or service for which the maintenance of cost records is required.

Requirements for the Non-Applicability of Cost Audit

The companies which do not need to audit their cost records are listed under Rule 3. They won't be audited under the following situations:

1. The export revenue of the company is more than 75% of the total revenue of the company. The export revenue must be in the form of foreign exchange.
2. The company should be operating from a special economic zone.
3. The company should be involved in the generation of electricity through Captive Generating Plant for captive consumption.

Conclusion

In this blog, we discussed cost records and cost audits. We also discussed the applicability of cost records and the applicability of cost audits and the conditions under which the companies do not have to perform an audit of their cost records.