Introduction: Understanding Cost Audit and Its Growing Importance for Businesses

In today’s compliance-driven business environment, cost audit has become more than just a regulatory requirement—it's a powerful financial tool. With increasing scrutiny from regulatory bodies and stakeholders, maintaining transparency in cost structures is essential for every growth-focused business. That’s where cost audit comes in.

Cost audit refers to the verification of cost records to ensure that they reflect a true and fair view of the cost of production and operations. It’s an essential process that strengthens cost control, boosts operational efficiency, and improves decision-making. More importantly, it helps companies remain compliant with Indian corporate laws.

Under the Companies Act, 2013, the Ministry of Corporate Affairs (MCA) has laid down clear provisions for maintenance of cost records and cost audits under Section 148. This section empowers the Central Government to direct specific classes of companies—particularly those operating in selected sectors—to maintain detailed cost records and get them audited by a Cost Accountant in practice.

For businesses operating in regulated industries such as pharmaceuticals, power, or petroleum, or even in non-regulated sectors like steel, cement, or edible oil, the importance of cost audit cannot be overstated. Not only is it a mandatory compliance requirement for certain thresholds, but it also plays a key role in identifying hidden inefficiencies and optimizing resource allocation.

Failure to comply with cost audit regulations can lead to penalties, legal action, and loss of reputation. That's why companies across Delhi, NCR, and all over India are partnering with experienced professionals like SSCOIndia.com to manage their cost audit obligations accurately and on time.

If you're unsure whether your business is covered under the Companies (Cost Records and Audit) Rules, 2014, it’s time to seek professional guidance and stay ahead of the compliance curve.

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✅ What is Cost Audit? A Simple Explanation for Business Owners

Cost audit is a systematic examination of a company’s cost accounting records, cost statements, and cost reports to ensure accuracy, completeness, and compliance with regulatory requirements. It goes beyond traditional financial audit by focusing solely on how much it costs a business to manufacture goods, deliver services, and run operations.

To put it simply, cost audit verifies whether the cost data maintained by a company is authentic, consistent, and aligned with prescribed rules and formats. This audit ensures that cost records are maintained as per Form CRA-1 and adhere to guidelines issued by the Institute of Cost Accountants of India (ICAI).

A cost audit is not conducted by just any auditor—it must be carried out by a Cost Accountant in practice. This professional is registered under the Cost and Works Accountants Act, 1959, holds a valid certificate of practice, and is eligible to sign off on statutory cost audit reports.

🎯 Key Objectives of Cost Audit

Understanding the goals behind a cost audit can help businesses recognize its value. The main objectives include:

1. Verification of Cost Records
   To ensure that cost records are kept properly and in accordance with applicable legal provisions.

2. Compliance with Section 148 of Companies Act, 2013
   To confirm that the company has met the requirements to maintain cost records and submit reports on time.

3. Accuracy and Reliability
   To check that cost statements represent the actual cost of operations, without inflation, omission, or manipulation.

4. Fraud Detection
   To uncover any misstatements, errors, or fraudulent practices related to costing.

5. Performance Evaluation
   Cost audits highlight areas where cost can be reduced or resources can be optimized.

6. Support for Government Decision-Making
   Accurate cost audit reports submitted to the MCA help the government in price fixation, taxation, and policy decisions.

7. Facilitating Internal Control
   Regular cost audits help management keep control over wastage, process inefficiencies, and cost leakages.

🧾 Legal Framework: Companies Act & Cost Audit Rules

The Companies Act, 2013, via Section 148, mandates certain companies to maintain cost records and have them audited. The detailed procedural framework is laid out in the Companies (Cost Records and Audit) Rules, 2014, which were last updated on July 15, 2016.

These rules specify:

• Which companies must maintain cost records

• When cost audit becomes mandatory

• The thresholds for turnover

• Forms to be filed (CRA-1 to CRA-4)

• Roles and responsibilities of cost auditors and company boards

📌 Real-World Importance of Cost Audit

Still wondering why cost audit matters?

Let’s say you’re running a pharmaceutical company with ₹60 crore turnover. Not only must you maintain detailed cost records for each product line, but you may also fall under mandatory cost audit requirements. Failure to comply could attract penalties, delay product approvals, or even block government tenders.

Now imagine you’re a steel manufacturer in Delhi with ₹120 crore turnover. You’ll need to maintain cost records and undergo a cost audit if your steel product turnover crosses the specified threshold.

In both cases, cost audit helps identify inefficiencies, curb wastage, and strengthen profitability—while ensuring you stay on the right side of the law.

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🚀 Final Note

Cost audit is not just a box-ticking exercise. It’s a valuable process that provides deep insights into your company’s cost structure, operational efficiency, and compliance standing.

Whether you are a large enterprise, an MSME crossing growth thresholds, or a startup looking to enter regulated markets, staying updated with cost audit requirements under Section 148 of the Companies Act, 2013 is essential.

Ready to take the next step?

📞 Contact SSCOIndia.com today for expert assistance in Cost Audit, GST filing, and company compliance in Delhi & NCR. We help you file the right forms, maintain statutory records, and avoid costly penalties.

Legal Foundation: Section 148 of the Companies Act, 2013

When it comes to understanding why cost audit is mandatory, everything begins with Section 148 of the Companies Act, 2013. This section forms the statutory foundation for cost audit and cost record maintenance in India, and is pivotal for companies operating in specified industries.

So, what exactly does Section 148 say?

Section 148 empowers the Central Government to:

• Direct specific classes of companies to maintain cost records, and

• Mandate cost audits of such records to ensure compliance and transparency.

In simpler terms, the government has the authority to decide which companies must follow cost accounting practices and undergo audits, based on their industry, turnover, and product lines.

🏛️ Central Government's Power under Section 148

The Central Government uses the authority granted under Section 148 to:

• Notify rules and formats for cost records,

• Prescribe thresholds for applicability,

• Appoint a Cost Auditor via the company’s Board,

• Collect data through statutory forms like CRA-1, CRA-2, CRA-3, and CRA-4.

This legal empowerment allows the government to ensure companies across key sectors—especially regulated industries like pharmaceuticals, telecom, electricity, and petroleum—comply with standardized cost reporting practices.

These powers are exercised through what is known as subordinate legislation—rules framed by the executive (MCA) under the authority of an Act passed by Parliament. For cost audits, this subordinate legislation is formalized as the Companies (Cost Records and Audit) Rules, 2014, notified under Section 148.

📄 Role of the Companies (Cost Records and Audit) Rules, 2014

To implement Section 148, the government issued the Companies (Cost Records and Audit) Rules, 2014, which are applicable to specific sectors and are updated periodically.

These rules lay down:

• Which companies are required to maintain cost records

• When cost audit becomes applicable, based on turnover thresholds

• The scope and format of cost records (CRA-1)

• Appointment and reporting procedures for cost auditors (CRA-2, CRA-3, CRA-4)

In short, Section 148 provides the legal backbone, while the Rules define the actionable steps.

For example, if a company’s turnover exceeds ₹35 crores and it falls under notified industries, it must maintain cost records. If further turnover thresholds are crossed, cost audit becomes mandatory as well.

📢 Notification Process and Updates

The Ministry of Corporate Affairs (MCA) notifies any changes in applicability, formats, and thresholds via the Official Gazette. This means businesses must stay updated with amendments—like the ones in 2014, 2015, and 2016—to ensure full compliance.

Missing out on updates could lead to:

• Incomplete record-keeping

• Incorrect audit submissions

• Monetary penalties under the Companies Act

That’s why professional assistance from experts like SSCOIndia.com is crucial for companies operating in cost-audit-sensitive industries.

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What are Cost Records? [Explained with CRA-1 Format & Real Examples]

Once you understand the legal base, the next step is to understand what cost records actually are—because maintaining them is the first compliance step before cost audits.

🔍 Definition Under Rule 2(e) of Cost Audit Rules

As per Rule 2(e) of the Companies (Cost Records and Audit) Rules, 2014, cost records are:

“Books of account relating to the utilization of materials, labour and other items of cost as applicable to the production of goods or provision of services…”

These records must be maintained by companies in specified sectors and those crossing a turnover threshold of ₹35 crore or more.

In other words, cost records document the cost structure of a company’s operations in granular detail, providing data on every rupee spent in producing goods or offering services.

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📂 CRA-1 Format: The Backbone of Cost Record Maintenance

Cost records must be maintained as per Form CRA-1, which prescribes 30 detailed cost elements that companies must track. Here are some key cost heads:

1. Material Cost – Raw materials, components, packaging

2. Employee Cost – Salaries, wages, bonuses, and perks

3. Utilities – Power, water, steam, etc.

4. Direct Expenses – Royalties, fees, outsourcing charges

5. Repair & Maintenance – Cost of maintaining machinery or systems

6. Fixed Assets and Depreciation

7. Overheads – Administrative, selling, and distribution costs

8. R&D Expenses – Product or process innovation-related costs

9. Pollution Control & Quality Control

10. Transportation Cost – Inward and outward logistics

11. Packing & Export Incentives

12. Reconciliation Statements – Matching cost data with financial books

Each of these must be maintained periodically (monthly/quarterly) and should allow for unit-wise, product-wise, and service-wise analysis.

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🎯 Purpose and Importance of Maintaining Cost Records

Maintaining detailed cost records isn’t just about checking a legal box. It serves several business-critical purposes:

📌 1. Cost Control and Efficiency

With detailed cost records, companies can identify areas of cost overruns, wastage, or inefficiencies and take corrective action.

📌 2. Strategic Planning

Helps in budgeting, forecasting, and strategic cost reduction.

📌 3. Accurate Product Pricing

Understanding exact production costs enables better pricing strategies—especially critical in competitive markets.

📌 4. Support for Cost Audit

If a company is required to undergo a cost audit, these records form the basis of the audit. Without CRA-1 compliance, audit reports (CRA-3) can be rejected.

📌 5. Government Regulation

Helps the Central Government in decisions like price fixation (e.g., pharma), subsidy allocation, or anti-dumping investigations.

📌 6. GST and Income Tax Reconciliation

Detailed cost records help reconcile financial and cost data, supporting GST return filing and IT compliance.

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🧾 Example: Why It Matters

Suppose you run a milk powder manufacturing unit in Delhi with ₹45 crore turnover. You fall under the non-regulated sector, but since your turnover exceeds ₹35 crore, you're required to maintain cost records in CRA-1 format.

If your milk powder product turnover crosses ₹35 crore, and total turnover crosses ₹100 crore, you must also undergo a cost audit. In such cases, incorrect or incomplete cost records could result in penalties and non-compliance notices from the MCA.

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🚀 Final Thoughts

Maintaining cost records is not just a legal requirement under Section 148 and CRA-1—it’s a business advantage. From internal cost control to external regulatory reporting, these records provide the foundation for operational transparency and compliance success.

Need help with CRA-1 maintenance or cost audit in Delhi NCR?
Trust the experts at SSCOIndia.com for end-to-end assistance in Cost Audit, GST filing, company registration, and more.

What is the Difference Between Cost Records and Cost Audit?

Many business owners confuse cost records with cost audit, but the two serve distinct purposes under the Companies Act, 2013. Understanding the difference is crucial for staying compliant with the Companies (Cost Records and Audit) Rules, 2014.

Let’s break it down clearly:

📘 Understanding the Key Differences

• Cost Records are like the backbone of your costing data—everything from material costs, employee salaries, utilities, production overheads, etc., must be logged as per CRA-1 format. These are ongoing books of account that provide transparency over how costs are incurred in the company.

• Cost Audit, on the other hand, is the third-party verification of these cost records by a certified Cost Accountant in practice. The cost auditor ensures that the data in CRA-1 is accurate, fair, and complies with the rules.

• Cost records are mandatory when turnover exceeds ₹35 crore, while cost audit is mandatory only when additional thresholds are crossed (as per Rule 4), depending on whether the company is in a regulated or non-regulated sector.

📢 Why Does This Distinction Matter?

Failure to maintain cost records may escape detection until a cost audit is required. But once a company falls under cost audit applicability, the absence or error in records will be penalized, affecting credibility, compliance rating, and may attract legal action under the Companies Act.

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Which Companies Need to Maintain Cost Records?

According to Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, every company—domestic or foreign—with an overall turnover of ₹35 crore or more in the previous financial year must maintain cost records if it is engaged in a specified industry.

These specified industries are divided into two categories:

🔹 A. Regulated Sectors:

• Pharmaceuticals

• Electricity

• Petroleum & Natural Gas

• Fertilizers

• Sugar and Industrial Alcohol

• Telecommunication

🔹 B. Non-Regulated Sectors:

• Cement

• Iron and Steel

• Edible Oils

• Tyres and Tubes

• Electrical and Electronic Machinery

• Medical Devices, and more (see Rule 3 for complete list)

✅ Exemptions from Cost Record Maintenance

Even if a company belongs to a listed sector, it may be exempt if:

• It is classified as a Micro or Small Enterprise (MSME) as per the MSMED Act, 2006.

• It operates exclusively from a Special Economic Zone (SEZ).

• It earns more than 75% of revenue from exports in foreign currency.

📌 Real-Life Examples

Example 1: Regulated Sector
A pharmaceutical company in Delhi with an annual turnover of ₹40 crore must maintain cost records under CRA-1 because:

• It crosses the ₹35 crore threshold.

• It falls under a regulated sector.

Example 2: Non-Regulated Sector
An iron and steel manufacturer with ₹50 crore turnover must also maintain cost records, even though it’s not in a regulated sector. The threshold is met, and the sector is covered under Rule 3.

These records help both management and regulatory bodies understand the company’s cost structure, operational performance, and tax compliance.

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When is Cost Audit Mandatory?

Maintaining cost records is the first step. But if your company crosses higher thresholds as defined in Rule 4, you are also required to undergo Cost Audit.

The cost audit applicability differs based on whether a company operates in a regulated or non-regulated sector.

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🔍 A. Regulated Sectors (As per Rule 4(1))

Cost audit becomes mandatory if:

• Total turnover from all products/services ≥ ₹50 crore, AND

• Turnover of individual product/service requiring cost records ≥ ₹25 crore

Example:
An electricity generation company with ₹60 crore total turnover and ₹30 crore in power generation must undergo cost audit. It crosses both thresholds.

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🔍 B. Non-Regulated Sectors (As per Rule 4(2))

Cost audit becomes mandatory if:

• Total turnover ≥ ₹100 crore, AND

• Turnover of product/service requiring cost records ≥ ₹35 crore

Example:
An edible oil manufacturing company with ₹120 crore total turnover and ₹40 crore specifically from edible oils must undergo cost audit. All thresholds are met.

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🔄 Exemptions from Cost Audit

Even if your company meets the turnover criteria, you are exempt from cost audit if:

• Over 75% of revenue is from exports in foreign exchange.

• The company operates from an SEZ.

• The company generates electricity solely for captive consumption.

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📢 Summary: Cost Records vs Cost Audit

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🚀 Take Action Before It's Too Late

Cost record and cost audit compliance is not optional—it’s a legal requirement under Section 148 of the Companies Act, 2013. Failing to comply can result in penalties, rejection of audit reports, or even regulatory investigations.

If your company is nearing these thresholds—or unsure about the applicability—don’t wait for a government notice.

✅ Contact SSCOIndia.com today for expert help with:

• CRA-1 and CRA-3 compliance

• Cost Auditor appointment and CRA-2 filing

• MCA submissions (CRA-4)

• Turnkey solutions for Delhi & NCR-based companies

Forms Required for Cost Audit Compliance (CRA-1 to CRA-4 Explained)

If your company falls under cost audit applicability as per Section 148 of the Companies Act, 2013, complying with the Companies (Cost Records and Audit) Rules, 2014 requires timely submission of specific statutory forms.

Each form—CRA-1 to CRA-4—plays a crucial role in ensuring that your cost audit process is transparent, traceable, and legally compliant.

Let’s break down the essential cost audit forms every eligible company must file:

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📘 CRA-1 – Maintain Cost Records

This is the foundation of cost audit compliance.

CRA-1 is not a form you submit, but a format prescribed for maintaining cost records. It defines 30 heads of cost elements like:

• Material cost

• Employee cost

• Utilities

• R&D expenses

• Administrative overheads

• Transportation cost

• Pollution control expenses

• Reconciliation of cost and financial records

💡 Key Point:
All eligible companies (with turnover ≥ ₹35 crore and covered under notified sectors) must maintain cost records in CRA-1 format, even if they are exempt from cost audit.

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📝 CRA-2 – Appointment of Cost Auditor

As per Rule 6 of the Cost Audit Rules, companies must appoint a cost auditor within 180 days of the beginning of the financial year.

CRA-2 is the form used to inform the Ministry of Corporate Affairs (MCA) about the appointment of the cost auditor.

Details Required:

• Corporate Identification Number (CIN)

• Financial year under audit

• Details of cost auditor

• Board resolution approving the appointment

📌 Deadline:
File CRA-2 within 30 days of Board approval or 180 days from the start of the financial year, whichever is earlier.

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📊 CRA-3 – Cost Audit Report

After completing the audit, the cost auditor prepares a CRA-3 report, which includes:

• Product-wise cost details

• Profitability analysis

• Ratio analysis

• Reconciliation of cost and financial accounts

• Observations and suggestions

The cost auditor must submit CRA-3 to the company’s Board of Directors within 180 days from the end of the financial year.

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📨 CRA-4 – Filing the Cost Audit Report with MCA

Once the Board reviews the CRA-3 report, the company must file CRA-4 electronically with MCA.

This is the final step in the cost audit compliance process.

Details Included:

• CIN

• Sector-wise audit coverage

• Cost auditor details

• XBRL cost audit report

• Company explanations on audit observations

📌 Deadline:
File CRA-4 within 30 days of receiving the CRA-3 report.

⚠️ Tip:
Any delay in CRA-4 filing can attract penalties under the Companies Act, so it's best to set internal compliance alerts or hire a professional.

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Consequences of Non-Compliance with Cost Audit Rules

Ignoring your cost audit obligations is not just risky—it’s legally dangerous and financially damaging.

The Companies Act, 2013 has strict provisions for non-compliance, both for companies and the appointed cost auditors.

Here’s what you could face:

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❌ Penalties for Companies

Under Section 147 and Section 148, a company that fails to:

• Maintain cost records (CRA-1)

• Appoint a cost auditor (CRA-2)

• Submit cost audit report (CRA-3)

• File audit report with MCA (CRA-4)

...can be penalized with:

• Fine of ₹25,000 to ₹5,00,000

• Additional daily fines if delay continues

• Disqualification of directors in extreme cases

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❌ Penalties for Cost Auditors

A cost auditor who:

• Fails to file the report on time,

• Files a false or misleading report,

• Omits mandatory observations,

...can be penalized under Section 148(8), which includes:

• Fine of ₹25,000 to ₹5,00,000

• Imprisonment up to 1 year, in case of fraud

• Suspension or cancellation of practice license

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💣 Business Impact Beyond Legal Penalties

• Loss of Investor Confidence: Investors rely on cost audit data to assess financial health and pricing efficiency.

• Missed Tenders or Government Contracts: Many public sector tenders require cost audit reports for eligibility.

• Income Tax & GST Scrutiny: Inaccurate cost records can lead to mismatches during tax audits or GST input credit claims.

• Damaged Reputation: MCA flagging for non-compliance appears in public filings—harming your brand.

📌 Pro Tip:
Avoid last-minute errors by working with a trusted cost audit consultant like SSCOIndia.com for end-to-end compliance.

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Conclusion & Call to Action

In today’s regulatory landscape, cost audit compliance is not optional—it’s essential for survival and growth, especially for companies in sectors like pharmaceuticals, power, steel, cement, and edible oils.

Let’s recap the key points:

• Cost audit is governed by Section 148 of the Companies Act, 2013 and enforced via the Companies (Cost Records and Audit) Rules, 2014.

• If your turnover is ₹35 crore or more, and you operate in specified sectors, you must maintain cost records (CRA-1).

• Depending on your industry and turnover, you may also need to appoint a cost auditor and undergo a cost audit.

• Filing CRA-2, CRA-3, and CRA-4 on time is mandatory to avoid fines and legal issues.

• Non-compliance can lead to penalties, reputational damage, and loss of market trust.

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📢 Don’t Risk Non-Compliance — Get Expert Help

If you’re unsure whether your business falls under cost audit rules or are facing challenges with CRA form filing, don’t delay.

🎯 Need help with cost audit compliance in Delhi NCR?
✅ Contact SSCOIndia.com today for:

• Cost records setup (CRA-1)

• Cost Auditor appointments (CRA-2)

• Audit report preparation (CRA-3)

• MCA filings in XBRL format (CRA-4)

With years of expertise, industry focus, and local presence, we help you stay compliant, save costs, and avoid penalties—on time, every time.