Cost Audit Techniques

There are no specific techniques being used by cost auditor in carrying out the cost audit assignments. Techniques employed by a Cost auditor in effectively carrying out his audit are –

Accounting or economic techniques

• Physical Verification.
• Comparison of data with Peer.
• Break-even analysis.
• Budgetary control including flexible budget system.
• Cost management techniques indicating how an organization’s assets should be allocated over competing projects or to decide whether it is worth proceeding with the investment, keeping in view proportionate value of expenditure on such projects.
• Discounted cash flow and net present value methods.
• Cost benefits analysis.
• Standard costing and marginal costing.
• Activity based costing to test the relevance of cost to activities.
• Quality analysis of company transactions.

Scientific Techniques

• Computer Models: There are many types of problems which can be solved on a computer e.g. decision on material mix, product mix, make or buy decisions etc.
• Network analysis: To analyze strings of tasks to arrange them in sequential or parallel order so that the project is completed in a shortest possible time.
• Mathematical Programme solving by heuristic (trial and error) techniques to determine the best material mix, best use of organization’s transport fleet, the best mix of products to obtain or to maximize profits and optimum use of labour, finance, equipments, etc.

Statistical Techniques

• Activity Sampling: It is one of the many ways in which the present workloads can be measured to obtain controls to be exercised by management.
• Monte Carlo Simulation: In this a number of variables are drawn from large statistical population which have equal choice of being selected and obtain the best sample possible.
• Exponential smoothing
• Inter firm comparison

Personnel Techniques

• Attitude survey
• Ergonomic (Man-machine relationship)
• Training methods
• Profitability and productivity measurement

General techniques

• Statistical theory of management is an attempt to emphasize what should be the practical approach to a problem by –
  • Analyzing the problem to establish the basic difficulties and factors involved.
  • Establish management by objectives.
  • Identifying the likely ways of tackling the problems in the light of objectives to develop a solution
  • Determine the key factors affecting management decision-making.
  • Evaluating alternative courses of action
  • Evaluating each alternative in terms of economy, efficiency and best fit.
  • Specifying the action required to exploit the situation to the best advantage of the organization.
• Brain storming
• Transfer pricing
• Management by objectives
• Management by exception
• Corporate planning
• Information theory