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Home Articles Corporate Laws / Banking / SEBI Mr. M. GOVINDARAJAN
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July 13, 2011
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In exercise of the powers conferred by Section 642(1)(b) of the Companies Act,1956 read with Section 223B(4) and Section 227(1) of the Companies Act, 1956 and in supersession of the Cost Audit Report Rules, 2001, except as respects things done or omitted to be done before such suppression, the Central Government made ‘Companies (Cost Audit Report) Rules, 2011 which came into effect from 03.06.2011.


These rules are applicable to every company in respect of which an audit of these records has been ordered by the Central Government under Section 223B (1) of the Companies Act. The said companies shall within ninety days of the commencement of every financial year file an application with the Central Government seeking prior approval for appointment of the Cost Auditor, through electronic mode, in the prescribed form, along with the prescribed fee as per the Companies (Fees on Applications) Rules, 1999 and requisite enclosures.   The Cost auditor so appointed shall within thirty days of receipt of letter of appointment inform his appointment to the Central Government through electronic mode, in the prescribed form, along with the requisite enclosures. 


The company shall keep and maintain cost details, statements, schedules etc., for each unit and each product or activity comprised in each product group, duly authenticated by at least two directors of the company and the cost auditor.  The cost details, statements, schedules etc., relating to a period of not less than 8 financial years immediately preceding a financial year, or where the company had been in existence for a period less than 8 years, in respect of all the preceding years shall be kept in good order.  The company and every officer thereof shall make available to the cost auditor, such cost accounting records, cost statements, other books and documents, and Annexure to the report, duly completed, as would be required for conducting the cost audit, and shall render necessary assistance to the cost auditor so as to enable him to complete the cost audit and submit his report within the time limit specified under these rules.

The term ‘product’ is defined under Rule 2(f) of the Rules as any tangible good, material substance, article, idea, know how, method, information, object, service etc., that is the result of human, mechanical, industrial, chemical or natural act, process, procedure, function, operation, technique or treatment and is intended for use, consumption, sale, transport, store, delivery or disposal.

The term ‘product group’ in relation to tangible products is defined under Rule 2(g) of the Rules as a group of homogenous and alike products, produced from same raw materials and by using similar or same production process, having similar physical or chemical characteristics and common unit of measurement, and having same or similar usage or application.   The ‘production group in relation to intangible products’ means a group of homogenous and alike products or services, produced by using similar or same process or inputs, having similar characteristics and common unit of measurement, and having same or similar usage or application.


The Cost auditor, who conducts an audit of the cost records of the company shall-

  • submit the report (Form I) along with the auditors’ observations and suggestions, and Annexure to the Central Government (Form II) and at the same time forward a copy of such report to the company;
  • furnish performance appraisal report, duly authenticated by the cost auditor, to the Board/Audit Committee of the company in Form III;
  • give clarifications, if any, required by the Central Government on the cost audit report submitted by him, within thirty days of the receipt of the communication addressed to him calling for such clarifications;
  • forward his report to the Central Government and the concerned company within 180 days from the close of the company’s financial year to which the report relates.


Annexure to Form III consists the following:

  • General information about the company;
  • Cost accounting policy;
  • Product group details;
  • Quantitative information;
  • Abridged cost statement;
  • Operating ratio analysis;
  • Profit reconciliation;
  • Value addition and distribution of earnings;
  • Financial position and ratio analysis;
  • Related party transactions;
  • Reconciliation of indirect taxes.

The Annexure with the cost audit report shall be approved by the Board of Directors before submitting the same to the Central Government by the Cost Auditor.   The Annexure, duly audited by the Cost Auditor, shall also be signed by the Company Secretary and at least one director on behalf of the company.   In the absence of the Company Secretary in the company, the same shall be signed by at least two directors.


The performance appraisal report consists the following:

  • Capacity utilization analysis;
  • Productivity/efficiency analysis;
  • Utilities/energy efficiency analysis;
  • Key-costs and contribution analysis;
  • Product/service profitability analysis;
  • Market/customer profitability analysis;
  • Working capital and inventory management analysis;
  • Manpower analysis;
  • Impact of IFRS on the cost structure, cash-flows and profitability;
  • Application of management accounting tools.

The above are only indicative. These are to be included/excluded depending upon the size/scale and type of operations, nature of the industry, management requirements etc., 


If default is made by the cost auditor in complying with the provisions he shall be punishable with fine which may extend to Rs.5,000/-

If a company contravenes any provisions of these rules the Company and every Officer thereof who is in default, including the persons referred to in Section 209(6) of the Act, shall be punishable as provided under Section 642(2) read with Section 209 (5) and (7) and Sec. 233B(11) of the Companies Act, 1956.


The supersession of the Cost Audit report Rules, 2001 shall not in any way affect-

(a)    Any right, obligation or liabilities acquired, accrued or incurred there under;

(b)   Any penalty, forfeiture or punishment incurred in respect of any contravention committed there under; and

(c)    Any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and; any such investigation, legal proceeding or remedy may be instituted, continued or enforced and any such penalty, forfeiture or punishment may be imposed as if those rules had not been superseded.


By: Mr. M. GOVINDARAJAN - July 13, 2011



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