BBA Study Material to Cost Accounting of Uniform Costing Interfirm Comparisons And Cost Audit Topic wise Short Notes

Bba Study Material to Cost Accounting of Uniform Costing Inter Firm Comparisons And Cost Audit Topic is Management Audit Short Notes

Management Audit

“Management audit can be defined as an objective and independent appraisal of the effectiveness of managers and the effectiveness of the corporate structure in the achievement of company objectives and policies. Its aim is to identify existing and potential management weaknesses with in an organisation and to recommend ways to rectify these weaknesses.”

Management audit is the systematic and dispassionate examination, analysis and appraisal of management’s overall performance. It is a form of appraisal of the total performance of the management by means of an objective and comprehensive examination of the organisation structure, its components such as department, its plans and policies, methods of process or operation and controls, and its use of physical facilities and human resources. Management audit is an important tool for the continuous appraisal and evaluation of the methods and performance of an enterprise. The prime objective of management audit is to locate defects of irregularities in the areas covered by the audit and to suggest possible improvement. It assists the management in managing the operations of an undertaking in the most efficient manner practicable.  Economic outlook, the adequacy of the organisation structure , compliance with policies and procedures, reliability of the system of control, adequate protective methods, causes of variances, effective utilization of man power and equipment, efficiency of the method of operation etc., all come under the purview of management audit. Thus management audit is concerned with evaluation and appraisal of the control system and information in the entire or in various segments of the organisations. Its scope has been widened to appraise in detail the systems and sub-systems, procedures, job separation, authorization, accountability, quality of personnel, quantity of information generation etc.

Objective of Management Audit

The main objectives of management audit are:

  • The ensure optimum utilization of human resources and available physical facilities.
  • To point out deficiencies in objectives, policies, procedures and planning.
  • To suggest improved methods of operations.
  • To point out weak links in organizational structure and in internal control system and suggesting improvements.
  • To help management by providing early signals of sickness, ways and means to avoid the same; and
  • To anticipate problems and suggest remedies to solve them in time.

Scope of Management Audit

The scope of management audit has no limitations. The areas of review depend on the objectives of the business. Accordingly, the scope of management audit may include:

  • The suitable, practicability and present compliance or otherwise of the organisation with its designated objects and aims.
  • The current reputation of the organisation in relation to the general public and within its own particular industrial or commercial field.
  • The rate of return on investors’ capital- whether poor, adequate or above average.
  • Relationship of the business with its own shareholders and the investing public in general.
  • The ratios of operating returns and the rate of return on capital projects.
  • The aims and effectiveness of management at its various levels such as top level, middle level and operational level.
  • Financial policies and control relating to production, sales and distribution and in other functions of the organisation.

Weaknesses Revealed by Management Audit

The weakness that a management audit might reveal may include:

  • Weaknesses among the members of the board of directors.
  • A lack of awareness among directors and managers of the objectives of the organisation and the extent to which these are being achieved, failure to define clearly the objectives and responsibilities of individual managers.
  • Inadequate steps taken to provide adequate finance.
  • Lack of technical competence of managers.
  • Retaining authority by managers for matters which ought to have been delegated
  • Lack of clear and identifiable management style in the organisation.
  • Lack of proper staff/ management training.
  • Failure on the part of managers to measure and assess the performance of their subordinates.
  • Inadequacy of the management information system.
  • Lack of enforcement of procedures and too much wastage of time in enforcing such procedures.

Weakness revealed by management audit should be studied in detail to ascertain the real causes and proper remedial action may be taken by the top management to eliminate such weaknesses.

Bba Study Material to Cost Accounting of Uniform Costing Inter Firm Comparisons And Cost Audit Topic is Efficiency Audit Short Notes

Efficiency Audit

Efficiency is the ratio of a system’s outputs to inputs and is strictly a limiting example of an idea of productivity in that an efficient system is one in which this ratio is optimal. Two categories of efficiency should be noted: Economic efficiency, which arises when the cost of inputs is minimised for a given level and mix of inputs and technical efficiency arises when the inputs is maximised for a given volume and mix of inputs. Effectiveness denotes accomplishment of objectives and efficiency denotes fulfillment of objective with minimum sacrifice of available scarce resources. Efficiency audit is the audit which ensures that every rupee invested yields optimum results. The main objective of efficiency audit is to ensure that:

  • There is most optimum utilization of investment, and
  • That investment is channelized in most profitable lines.

Efficiency audit indicates towards appraisal or scrutiny of actual performance with reference to expected efficient standards. The parameters based on which efficiency audit is conducted are:

  1. Return on capital
  2. Capacity utilization
  3. Optimum utilization of men, machines and materials
  4. Export performance and import substitution
  5. Liquidity position
  6. Payback period.

 

Bba Study Material to Cost Accounting of Uniform Costing Interfirm Comparisons And Cost Audit Topic is Propriety Audit Short Notes

Propriety Audit

The propriety audit refers to verification of transactions on the tests of public interest. Commonly accepted customs and standards of conduct. E.L. Kohler defines the terms propriety as “that which meets the tests of public interest, commonly accepted custom and standards of conduct, and particularly as applied to professional performance, requirements of law, government regulations and professional codes”. It is an examination of actions and decisions to find out whether they are in public interest and meet the standards of proper conduct. The propriety audit is concerned with examining that there is no leakage of revenue or wastage of funds by mistake or fraud. It is concerned with ascertaining appropriateness from legal, financial or economic point of view. The use of public money in PSEs, requires proper utilization. Each PSE will have to follow clearly laid down rules, procedures and authorization while spending the funds. The approval of expenditures is governed by the principle of ‘propriety’ which requires to answer the following questions:

  • Whether the proposed expenditure is justified
  • Whether the alternative ways exists in minimisation of cost
  • Impact of the expenditure on the overall business
  • Whether the expenditure is properly authorised as per the internal procedures laid down
  • Whether the expenditure is incorporated in the budget approved by board of directors
  • Whether the expenditure to be incurred in exceptional cases, proper authorisation and financial concurrence is obtained from the competent authority.

The government spending in India is subject to the standards of propriety as follows:

  • The expenditure should not be prime face more than what the occasion demands and that every officer exercises the same degree of vigilance as in respect of his own money.
  • No authority in the exercise of its powers of sanctioning expenditure should pass an order which will directly or indirectly accrue to its own advantage.
  • The funds should not be utilized for the benefits of a particular person or group of persons.
  • A part from the agreed remuneration or reward there should not be left open any other avenue to indirectly benefit the management personnel, employees and others; and
  • Allowances and other payments other than those covered in the agreed remuneration should not be allowed to be a source of profit for the recipient ( e.g. daily allowance for outstation work)

 

Bba study Material to Cost Accounting of Uniform Costing, Interfirm Comparisons And Cost Audit Summary

Summary

  • Uniform costing is the use of standardised principles and methods of cost accounting employed by different undertaking in the same industry.
  • The basic objective of uniform costing is to facilitate Interfirm comparisons by maintenance of reliable cost data for comparison of operational efficiency of individual concerns within the industry and to assist in fixation of common selling price for the entire industry.
  • Industry / trade associations generally take active role in adoption of uniform costing in industry.
  • A document called ‘uniform cost manual’ is adopted by the undertakings in the industry, which contains principles, methods and procedures to be adopted for ascertainment of profitability and revenues and for cost management purposes.
  • Uniform costing facilitates cost comparisons among different concerns producing same products and enables each concern to measure its own efficiency with competitors.
  • The main limitation of uniform costing is that business concerns are avert to disclose the confidential information,; and it also difficult to standardise the cost procedure in the industry.
  • Sometimes uniform costing may lead to monopolistic tendencies by forming all the undertaking in the same industry as cartel, in price fixation.
  • Interfirm comparison in a technique of evaluation of operational performance, efficiency, costs, profits etc, of firms involved in the same line of business by producing same type of product.
  • For making Interfirm comparisons, adoption of uniform costing is a prerequisite.
  • The industry/trade associations generally collect information from its members and disseminate the same among its members.
  • While making comparisons, it to be considered about the experience curve of the competitors, capital employed, geographical location, technology adopted etc.
  • Cost audit is the verification of the correctness of cost accounts and checking the adherence of cost accounting plan.
  • The central government can order for conduct of audit of cost accounts in respect o f class of companies which are required to maintain books of account under the provisions of section 209(1)(d) of the companies Act, 1956.
  • The cost auditor should comply with the provisions of cost audit (report) rules, 1966.
  • The records contemplated under section 209(1)(d) of the companies Act, 1956 would include all accounting reports maintained by the company to be made available to the financial auditor.
  • The cost records would relate to production, work-in- progress and finished goods stock, repairs and maintenance, utilities like steam, power, water, details of raw material and stores, wage and salaries, overheads, cost accounts.
  • Management audit is the comprehensive and constructive examination of an organisation structure of a company and its plans and objectives, its means of operation and its use of human and physical facilities.
  • Management audit is performed with the object of examining the efficiency of the information control system, management and management procedures towards the achievement of enterprise goals.
  • Efficiency audit is conducted to appraise or scrutiny of actual performance with references expected efficient standards and to ensure that the amount invested yields optimum results.
  • Propriety audit is the examination of action and decisions to find out whether they are in public interest and meet the standards of proper conduct and to examine there is no leakage or wastage of public funds by mistake or fraud.

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