Cost audit now mandatory for realty firms, hospitals and educational institutions

The government has made it mandatory for real estate companies, hospitals and educational institutions to maintain cost records and audit, in order to bring in transparency and keep a check on their costing.

The move will bring in the much-needed transparency in fixing of house prices by real estate firms and treatment costs at hospitals, while keeping a check on the fee charged by private educational institutions.

It will also help the government and regulatory authorities to set price ceilings for products and services offered by these crucial sectors.

These sectors were out of the purview of cost audit so far and consumes were at the receiving end with no way to determine whether the costs being charged were appropriate.

"Cost records shall be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis," a notification by the ministry of corporate affairs said.

The cost records should be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilisation of resources, it further added.

The ministry, however, spared some sectors like automobiles, electronics, electrical, paper, textile, paint and glass that were earlier required to maintain cost records and conduct cost audit.

The notification classified four broad sectors for which cost records need to be maintained and cost audit filed with the government. The first category comprises companies engaged in the production of goods in strategic sectors such as machinery and mechanical appliances used in defence, space and atomic energy. To fall under the category, the net worth of the company should be at least Rs500 crore or its turnover should be at least Rs500 crore.

The second category includes companies engaged in an industry regulated by a sectoral regulator or a ministry or department of central government. These include certain kinds of port and aeronautical services, telecommunication services; generation, transmission, distribution and supply of electricity, steel, roads and other infrastructure projects, drugs and pharmaceuticals, fertilisers and petroleum products. 

The addition of roads and infrastructure projects is likely to help in fixing of toll charges. In the case of a multi-product or a multi services company, products or service with turnover of at least Rs50 crore will be covered in the audit.

The third and crucial category is for companies operating in areas involving public interest such as railway or tramway locomotives, mineral products (including cement), companies engaged in education services, edible oil under administrative price mechanism, construction industry, companies engaged in health services such as running hospitals, diagnostic centres, clinical centres or test laboratories.

For this category, any product or a service (in multi-product company) for which the individual turnover is Rs50 crore or more will need a cost audit.

In the case of a company producing any one specific product or service, cost audit will be required if the net worth of the company is at least Rs150 crore or the turnover is Rs25 crore or more.

The last category for whom cost audit is required comprises companies (including foreign companies other than those having only liaison offices) engaged in the production, import and supply or trading of a classified set of medical devices.

The last date for filing application for appointment of cost auditor under earlier rules was 30 June 2014.

These rules supersede eight sets of rules notified under the Companies Act, 1956.

The new rules specify four classes of companies, which shall be required to maintain cost records and who will be subject to cost audit, the ministry notification said.