Internal Audit of Manufacturing Company

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Internal Audit of Manufacturing Company

Purchase, Store, Production, Sales, Marketing, Security, Lab, are important department of every Manufacturing Company, 
Internal audit have big role to analyse for smooth functioning of every departments.

Here is brief function of Internal audit of manufacturing company.  




Sr.NoFUNCTIONS
1Plant Operation
aYield-Machinery, Manpower & Material
b Budgeted Variance of Production
c Power Analysis
d Labour Analysis
e Treatment of Focus Coil lying unused
f Production Delay due to unavailability of Resources (Material,Labour,Machinery & others)
g Capacity Utilisation of Machine & Labour
h Transit damaged Material
i Abnormal Losses If Any
jQuality Audit of Inward and Outward
kReview of Man Power Allocation Planning
lReview of Plant HR Policy-Labour Policy
mSecurity
i. Maintenance Schedule of Machinery
ii. Security Register Abnormal Report Review (Shift Change)
iii. Rotation of Security Staff
iv. Insurance of Machinery Labour,Factory,Vehicle & Cash in Transit
n Input & Output Matching with Inward/Outward/Dispatch/RG 1,23/Tally etc.
o Audit of Security Gate Process


Sr.NoFUNCTIONS
2Purchase
a Review of PO Made during the Period
b Listing of unauthorized Purchase as per Power Limit
c Review of Contract Made during the period
d Review of Vendor Selection Process
e Review of Vendor Payment Policy
f Overdue PO
g Vendor Performance as per PO
h Review of Forward Contract
3Stores Audit
a Inward /Outward of Store Register with Gate Records
b Review of Inward & Issue Activity
c Adhoc Audit of Bin Card Maintenance
d GRN Date vs. Security Date Review
e Review of Quality Control Of Store
f Review of Store Management
g Review of Action taken on Short Delivery
h Review of Slow/Non Moving Stock
i Minimum order Quantity Review
4Statutory compliance
a Excise Register Matching with Inward & Outward
b Job work Register (57 (F4)
c TDS Deduction Practice
d Service Tax Review
e Foreign Payment Review
f PF & PT Review
g VAT Review
h Cases Pending Under Negotiable Instrument Act


Sr.NoFUNCTIONS
5ROC compliance & Corporate Governance
aReview of Minute Books
b Review of Filling
c Review of Power Used by Company Officer
d CSR
e Any Non Compliance as per Companies Act
6Ledger Scrutiny
7Cash & Bank Review
a BRS
b Physical Verification Cash
c LC Discounting & Charges
d Interest & Charges Review
e Stale Cheque Report
f Cheque Bounce Report
g Fund Management
8Corporate HR & Payroll
a Application of HR Policy
b Review of Reimbursements
c Review of Grievances
d Status of Vishakha Committee
e Surprise Head Count as per attendance Report
f Reconciliation of Employee Loan & Advances
g Review of Staff Welfare (Medical, working Environment, Staff Motivation, Training)
h Late Coming Report
iPerformance Review of System, Policy & Technology
9Audit of Exp.
a Verification of Bills with Tally
b Approval Review of Bills
c Review of Bill Supporting
d Review of Debit Note-To be Raise/Raised
e Trend Analysis according to Sales/Production
f Forex Gain/Loss Calculation
10MIS Authenticity
11Audit of Sales
a Verification of Bills with Tally
bReview of Bill Supporting
c Review of Credit Note-To be Raise/Raised
d Review of Transport Challan Attached with Invoice
e Penalty & Price Variation Review
f Budgetary Performance
g C & F Form Status
h Utilisation of Advance Authorization Licenses
12Marketing
a Customer Complaint Addressal Review
bTarget Performance-KAM
c Debtors Performance-Ageing
13Business Analysis
a Industry Overview-Future Prospect of Business
b Ratio Analysis -In comparison with Industry
c Technology Review
d Costing & Pricing of Product
14Capex
a Capex Bills Review
b Capitalization Checking
c FAR Checking
d Barcode & Tagging Status
15Overview Assurance on Internal Control
16Transporting & Logistic
a Review of Transportation Contract & Rate
b Transportation Expense & Pooling Review
17Follow up of Previous Audit
18Stock Audit
19Any other area Requested by management
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Overheads ~ Cost Accounting Standard

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Overheads 
1. Introduction 

In Cost Accounting the analysis and collection overheads, their allocation and apportionment to different cost centres and absorption to products or services plays an important role in determination of cost well as control purposes. A system of better distribution of overheads can only ensure greater accuracy in determination of cost of products or services. It is, therefore necessary to follow standard practices for allocation; apportionment and absorption of overheads for preparation of cost statements.

2. Object  

2.1 The standard is prescribe the method of collection, allocation, apportionment of overhead and absorption  there of to products an absorption thereof  to products or services on a consistent and uniform basis in the preparation of cost statements and to facilitate inter-firm comparison. 

2.2 The standardization of collection, allocation, apportionment and absorption of overheads is to provide a scientific basis for determination of cost of different activities products, services, assets etc. 

2.3 The standard is to facilitate in taking commercial and strategic management decisions such as resource allocation product mix optimization, make or buy decision, price fixation, etc. 

2.4 The standard aims at ensuring better disclosure requirement and transparency in the cost statement. 

3. Scope 

3.1. The standard should be followed for treatment of overheads by all enterprises including companies covered under Cost Accounting Record Rules issued in pursuant to Sec. 209 (1) (d) of the Companies Act, 1956 or under the provision of any other Act, Rules and Regulations. 

3.2 The standard shall be applied in Cost  and Management Accounting practices relating to 
(a) Cost of products, services or activities 
(b) Valuation of stock
(c) Transfer pricing
(d) Segment  performance 
(e) Excise & Custom duty, VAT, Income Tax, Service Tax  and other levies, duties and abatement fixation 
(f) Cost statements for any other purpose.


4. Definitions

4.1 Overheads --- Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not direct expenses which are not directly identifiable or allocable to a cost object in a economically feasible way. 

Overheads are to be classified on the basis of functions to which overheads are related (Refer to ‘classification of cost’ – CAS –I) viz 

-- Production overheads 
-- Administrative overheads
-- Selling  overheads
-- Distribution overheads 

Overheads may also be classified on the basis of behaviour such as 

--Variable overheads,
--Semi-variable overheads 
  --Fixed overheads. 

Variable overheads comprise of expenses which vary in proportion to the changes of volume of production. For example, cost of utilities etc. 

Fixed overheads comprise of expenses whose value do not change with the change in volume of production such as salaries, rent etc., 

Semi-variable overhead partly affected by change ion the production volume. They are further segregated into variable overheads and fixed overheads. 

Items not to be treated as overheads:

 Overheads arising out of abnormal situation in business activity (charged to Costing P/L A/c)

Items not related to business activities such as donation, loss / profit on sales of assets etc. are also not be treated as overheads. 

Borrowing cost and other financial charges including foreign exchange fluctuations will not from the part of overheads. 

4.2 Collection of overhead --- Collection  of overheads means the pooling of indirect items of expenses from books of account and supportive / corroborative records in logical groups business regards to their nature and purpose. 

Overheads are collected on the basis of pre-planned groupings, called COST POOLS. Homogeneity, of the cost components in respect of their behaviour and character is to be considered in developing the cost pool. Variable and fixed  overheads should be collected in separate cost  pools under cost centre. A great degree of homogeneity in the cost pools are to be maintained to make the apportionment of overheads more rational and scientific. A cost pool for maintenance expenses will help in apportioning them to different cost centres which use the maintenance service. 

4.3 Allocation of overheads --- allocation of overheads is assigning a whole items of cost directly to a cost centre. 

An items of expenses which can be directly related to a cost centre is to be allocation to the cost centre. For  example , depreciation of a particular machine should be allocated to a particular cost centre if the machine is directly attached to the cost centre. 

4.4 Apportionment of overhead : Apportionment of overheads to more than one cost centre on some equitable  basis. 

When the indirect costs are common to different cost centres. These are to be apportioned to the cost centres on an equitable basis. For example, the expenditure on general  repair and maintenance pertaining to a department but has to be apportioned to various machines (Cost Centres in the department. If the department is involved in the production of a single product. The whole repair & maintenance of the department may be allocated to the product. 

4.5 Primary and Secondary Distribution of Overheads: 

In case of multi-product environment, there are common service cost centres which are providing services to the various production cost centres and other service cost centres. The costs of services are required to be apportioned to the relevant cost centres. 

First step to be followed is to apportion the overheads to different cost centres-- Primary Distribution.

Second step is to apportion the costs of service cost centres to production cost centres on an equitable basis. --Secondary Distribution.

4.6 Absorption of overheads --- Absorption of overheads is charging of overheads from cost centres to products or services by means of absorption rates for each cost center which is calculated as follows: 

                                                                 Total overheads of the cost centre absorption  
Overhead absorption rate   =            ----------------------------------------------
                        Total  quantum  of base 

The base (denominator) is selected on the basis of type of the cost centre and its contribution to the products or services, for example, machine hours, labour hours, quantity produced, etc. 

Overhead absorbed = Overhead absorption rate   units of base in product or service 

4.7 Normal Capacity is the production achieved or achievable on an average over a period or season under normal circumstances taking into  account the loss of capacity resulting from planned maintenance. (CAS -2)

5. Apportionment and absorption of Production Overheads 

5.1 Overheads are to be apportionment to different cost centres based on following 2 principles: 

i) Cause and Effect – Cause is the process or operation or activity and effect is the incurrence of cost. Apportionment of overhead based on this criterion guided by the relationship between cost object and cost. 

ii) Benefits received – overheads are to be apportioned to the various cost centres in proportion to the benefits received by them. 

5.2 Primary Distribution of overheads: 

Basis of primary apportionment of items of production overheads is to be selected to distribute them among  the cost centres following the above two principle as   given 
above in    5.1 

Basis of apportionment must be rational to distribute overheads. Once the base is selected. The same is to be followed consistently and uniformly. However, change in basis for apportionment can be adopted only when it is considered necessary due to change in circumstances like change in technology, degree of mechanization product mix. Etc. In case of such changes, proper disclosure in cost records is essential. 

Examples of basis of primary distribution of some items of production overheads 
--------------------------------------------------------------------------------
Items of  Cost                                           Basis of Apportionment 
--------------------------------------------------------------------------------
Power                                    (H.P rating of Machines X hours  x L.F*) 
Fuel                                               Consumption  rate X  hours 
Jigs, tools & fixtures                                       Machine hours or  Man hours 
Crane hire  charge                             Crane hours or weight of materials handled 
Supervisors salary & fringe benefit                       Number  of employees 
Labour  welfare cost                                                Number of employees 
Rent  &  rates                                                         Floor or Space area 
Insurance                                                         Value of fixed asset
Depreciation                                                 Value of fixed asset
----------------------------------------------------------------------------------

*L.F  = Motor Load  Factor 

5.3 Secondary Distribution of Overheads: 

Secondary distribution of overheads may be done by following either Reciprocal basis or Non-Reciprocal basis. While reciprocal bass considers the exchange of service among the service departments, non-reciprocal basis considers only one directional service flow from a service cost centre to other production cost centres(s).

5.4 Secondary Apportionment of Overheads on Reciprocal Basis. 

The service rendered by certain service cost centres are also by other service cost centres. In reciprocal secondary distribution, the cost of service cost centres are apportioned to production cost centres as well as other service cost centres. In such case, anyone of the following three methods may be followed: 

I. Repeated Distribution Method 

II. Trial  & Error  Method 

III. Simultaneous  Equation Method 

5.4.1. Repeated Distribution Method 

i) The proportion at which the costs of a service cost centres are to be distributed to the production cost centres and other service cost centres are determined. 

ii) Costs of first service cost centres are to be apportioned to production cost centres and service cost centres in the proportion as determined in steps (i). 

iii) Similarly, the cost of other service cost centres are to be apportioned. 

iv) This process as stated in (ii) and (iii)  are to be continued toll the figures remaining un-distributed in the services cost centres are negligibly small. The negligible small amount left with service centre may be distributed to production cost centres. 

5.4.2 Trial and Error Method 

Steps  to be followed under this method are : 

(i) The proportion at which the costs of a service cost centres are to be distributed to production cost centres and other service cost centres are determined. 

(ii) Cost of first service cost centre is distributed to the other service centres in the proportion of service they received from the first as assessed in step (i). 

(iii) In the next step, total cost of second service cost centre so arrived has to be distributed to the other service centres in the proportion of service they received from the second as assessed in step (i). 

(iv) Similarly, the cost of other service cost centres are to be apportioned to the service cost centres. 

(v) This process as described in (iii) and (iv) is to be continued till the figures remaining undistributed in the service cost centres are negligibly small. 

(vi) At the least, total cost of service cost centres to be distribution to production cost centres. 

5.4.3 Simultaneous Equation Method 

The  simultaneous equation method is to be adopted to take care of secondary distribution of  cost of service cost centres to production cost centres with the help of mathematical formulation and solution. Step to be followed : 

i) Proportion of service benefits received by different cost centres from a cost centres are assessed on the basis of records. 

ii) The same rations are used as coefficient in the equations framed for apportionment of cost of service cost centres to production cost centres. 

iii) Solution of the equation gives the cost of service cost centres. 

iv) Cost of service cost centres to be distributed to production cost centres. 

5.5 In non-reciprocal secondary distribution, the costs of service cost centres are apportioned to the production cost centres. Steps involved are: 

i) The cost of first service cost centre is apportioned on a suitable is apportioned on a suitable basis to production cost centres. 

ii) The next steps is to apportion the cost of second service centre to the production cost centres as indicated in stage (i). 

iii) The process is to be continued till the costs of all service cost centres are apportioned. 

5.6 Common bases for absorption of production overheads from, production centres to products or services 

Base of denominator Applicability 

Unit of production When single product is produced or various products 
           are similar in specification. 

Direct labour cost When conversion process is labour intensive and 
                       wage rates are substantially uniform 

Direct labour hour When conversion process is labour intensive 

Machine Hours or Vessel When production mainly depends on performance
Occupancy or Reaction or of the base
Crushing Hours etc. 

5.7 Absorption of Production Overhead and production Capacity 

Overheads shall be analysed into variable overheads and fixed overheads. 

The variable production overheads shall be absorbed to products or services based on actual capacity utilization. 

The fixed production overheads and other similar item of fixed costs such as quality control cost shall be absorption in the production cost on the basis of the normal capacity or actual capacity utilization of the plant whichever is higher. 

In case of less production then normal, under-absorption of overheads shall be adjusted with, Costing Profit & Loss Account. In case of higher production than normal, the over-absorption of overheads shall also be adjusted with Costing Profit & Loss Account. 


5.8 Absorption of Production overheads : 

Production Overheads absorption rate for each cost centre is to be determined with the help of quantum base as indicate in 5.6 above and the formula as indicated below : 



           
                                                                  Fixed overheads
Fixed overheads absorption rate =    ---------------------------------------------------
                                        Normal or actual quantum of base, whichever is higher


                                                                              Variable overheads
Variable overheads absorption rate =     ---------------------------
                                                                               Actual quantum of base 

5.9 A pre-determined rate may be used on a provisional basis for internal management decision making such as cost estimates for quotation, fixation of selling process etc. These rates are to be calculated for each cost centres for a particular period. Budgeted overheads for the respective cost centres for the period concerned are to be taken as numerator and budgeted normal bases for the period as denominator for determining the rate.  

                                                                        Budgeted Overheads for the period
Pre-determined overhead rate =    ------------------------------------------
                                                                     Budgeted normal base for the period 

The amount of total overheads absorbed by a product, service or activity will be the sum total of the overheads absorbed form individual cost centres on pre-determined basis. The difference between overheads absorbed one pre-determined basis and the actual overheads incurred is the under –or over –absorption of overheads. 

The under or over-absorption of overheads is mainly due to variation between the estimation and actual. 

6. Apportionment and absorption of Administrative Overheads 

6.1 Administrative overheads included the following items of cost: 

Printing and stationery, other office supplies
Employees cost – salaries of administrative staff 
Establishment expenses – Office rent  & rates, insurance, depreciation of office building and other assets, legal expenses, audit fees, bank charges, etc. 

6.2 Administrative overheads are to be collected in different costs pools such as :  
--- General Office 
--- Personnel department
--- Accounts department
--- Legal department
--- Secretarial department .etc. 

6.3 Administrative overheads are to be further analysed into two-one for production activities and other for sales and distribution activities. Costs collected under the cost pools indicated in 6.2  above are to be distributed to administrative overheads relating to production activities and administrative overheads relating to selling and distribution activities on rational basis for each cost pool. 

6.4 Administrative overheads relating to production activities are to be apportioned to different production cost centres on the basis conversion costs of production cost centers. The apportioned overheads are absorbed to products on the basis of the normal capacity or actual capacity, whichever is higher. 

In case of under-absorption or over absorption of administrative overhead relating to production, tile same shall also be adjusted with Costing Profit & Loss Account. 

7. Apportionment and absorption of selling overheads and Distribution overheads 

7.1 The selling overheads and distribution overheads are collected under different cost pools such as: 

Selling Overheads: 

(i) Sales  employees cost 
(ii) Rent
(iii) Travelling  expenses
(iv) Warranty  claim
(v) Brokerage  & commission
(vi) Advertisement relating to sales and sales promotion 
(vii) Sales incentive
(viii) Bad debt, etc. 

Distribution  Overheads  : 

(i) Secondary  Packaging
(ii) Freight & Forwarding
(iii) Warehousing  & Storage 
(iv) Insurance, etc. 

7.2 Some items of selling overheads and distribution overheads are directly identified and absorbed to products or services and remaining part of selling and distribution overhead along with the with share of administration overheads relating to selling and distribution activities are to be apportioned to various products or jobs or services on the basis of net actual sales value (i.e. Gross sales value less excise duty, sales tax and other government levies). 

8. Presentation and Disclosure: 

8.1 Once the basis of collection, allocation, apportionment and absorption for different production cost centres are selected, the same shall be followed consistently and uniformly. 

8.2 Change  in basis for collection, allocation apportionment and absorption can be adopted only when it is compelled by the change in circumstances like change in technology, refinement and improvement in the basis, etc. and the scientific approach. In case of such changes, proper disclosure in cost records is essential. 

8.3. Any changes in basis for collection, allocation, apportionment and absorption which has a materials effect on the cost of the product should be disclosed in the cost statements. Where the effect of such changes is not ascertainable wholly or partly, the fact should be indicated in the cost statement. 

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Checklist for Balance Sheet Finalization

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Balance Sheet Finalization account checklist 

There are various step to be done and checked before finalize your company or firm account.

Here is important 32 checklist points of the checklist in brief,  which is useful for Balance Sheet process. 




SR.NO.Description
1No Entry On National Holiday.
2Confirmation of Secured Loans.
3Confirmation of Unsecured Loans.
4Confirmation of S.Creditors (Specialy Those With Debit Balance.)
5Confirmation of S.Debtors (Specialy Those With Credit Balance)
6Bonus Sheet To Be Tallied With Bonus Paid In Cash And By Cheque.
7Check Cash For Negative Balance.
8Electricity Charges For 12 Months Entered Or Not.
9Salary Sheet – Tally With Salary Paid In Cash+Cheque. Salary of Employees Who Have Not Signed Salary Sheet Should Reflect As Payable. Tally With Salary Summary For Whole Year.
10Copy of All Full & Final A/C Papers Required.
11Insurance Exp. – Pre-Paid Entries To Be Done. Copy of All Cover Notes To Be Kept In Balance Sheet File.
12Other Pre-Paid Exp. Entries Like Licence Fee, AMC Etc.
13Tally Opening Balance With Last Year Balance Sheet.
14Reconcile Sale + Purchase With Sales Tax Returns.
15Licence Fee – Receipt Or Covering Letters of Licence Copy.
16Tel. Exp. – Bill of 12 Months Entered Or Not. Narration Similar To That of Electricity Exp.
17Depriciation Entries.
18Tally Tds Certificates With Relevant Ledgers.
19Tally Tds Returns With Relevant Ledgers.
20Reconcile All Bank Accounts.
21G.P. Rate Comparison With Last Year.
22Audit Fee To Be Entered.
23Check Cash Exp. Vouchers.
24Check All Debit Notes / Cr. Notes. Should Be Signed
25Check All Cash Receipts. Should Be Signed
26Check All Discounts To Customers Or Short & Excess Or Bad Debts Vouchers. Should Be Signed
27All Heads In Previous Year P&L, Trading Balance Sheet Should Be In Current Year Balance Sheet And Comparasion of Amount To Be Done.
28Challans of All Govt. Dues To Be Enclosed With I.T.R., VAT / CST / ESI / EPF / TDS Etc .
29Exp. Payable Entries : Tel., Electricity, Water Etc .
30Freight Inward For All Central Purchases Should Be Entered.
31Transfer Previous Year Pre-Paid To Relevant Expense Head.
32Check Payment of Previous Year Expenses Payable.

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Highlights of Companies Act 2013

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HIGHLIGHTS OF COMPANIES ACT 2013
As per “Companies Act 2013” following provisions required instant action:
1) The Act is organised in 29 chapters, 470 sections & 7 schedules.
2) Substantial part of this act is in the form of Rules.
3) The Act introduced the concept of CEO, CFO and KMP.



4) The Act also introduced concept of one Resident director.
5) Loan taken from shareholders is now treated as deposit.
6) Companies must provide companies details such as Name, CIN, Registered Office Address, Email, Phone no. etc. in its documents Including Letter Heads & Other Stationery.
7)  Digital signature certificate is now mandatory for all person applying for DIN.
8)   Now Book of Accounts may be kept in Electronic Form.
9)  Now any documents & agreements can only be signed by KMP  Or by person authorised by the Board on their behalf.
10) Common seal of organisation is compulsorily required for authentication Of all documents, earlier it was not mandatory.
11) Now Cash Flow will be a part of Financial Statement in all companies.
12) New concepts such as OPC, Small Companies, Registered Valuer, COBetc. are brought forward in this new versatile Act.
13) For conversion of private company into public company requires approval of NCLT, earlier such power was with central government.

MEANING OF “RELATIVE” AS PER COMPANIES ACT 2013
   
  As per New Companies Act 2013, Relative means any person who is related  to another person as if ;     
  1) They are husband and wife  
  2) They are members of a Hindu Undivided family    
One can be related with other in such a manner mentioned below :
  i) Father, here the term father also includes "step father".  
  ii) Mother, here the  term mother includes  "step mother".  
  iii) Son, here the term mother includes "step son"
  iv) Son's wife .  
  v) Daughter .  
  vi) Daughters husband .  


  vii) Brother, here brothere also includes "step brother".
  viii) Sister, here sister also included "step sister ".

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