Cost Records vs Cost Audit: What Growing Companies Need to Know

The difference between cost records and cost audit is easy to miss. Both requirements arise from Section 148 of the Companies Act, 2013 and the Companies (Cost Records and Audit) Rules, 2014, but they operate at different levels. Before looking at the audit thresholds, a company must first determine whether its activities are covered by the rules at all.

The Institute of Cost Accountants of India (ICMAI) currently publishes a consolidated 2025 edition of the rules together with its technical guidance and FAQs.

What each one is

Cost records are the detailed records used to identify and analyse the cost of producing goods or providing services. Depending on the business, they may include information relating to materials, employee costs, utilities, production quantities, capacity, overheads, cost of sales and margins. Companies covered by the rules keep these records with the particulars set out in Form CRA-1.

Cost audit is the separate statutory examination of those cost records by an eligible Cost Accountant in practice. A company therefore should not ask only:

“Do we need a cost audit?”

It should first ask:

“Are we required to maintain cost records?”

Step 1: Is the activity covered?

Rule 3 lists the goods and services covered, in two tables.

Table A: regulated sectors, such as telecommunications, electricity, petroleum products, drugs and pharmaceuticals, fertilisers, and sugar and industrial alcohol.

Table B: non-regulated sectors, covering specified manufacturing and service activities including iron and steel, cement, chemicals, textiles, electrical and mechanical machinery, health services and several other categories.

The exact statutory description and applicable tariff heading matter. A broad description such as “manufacturing company” is not enough by itself.

Step 2: Does the ₹35 crore cost-record threshold apply?

For an otherwise covered company, cost records become relevant where overall turnover from all products and services in the previous financial year is ₹35 crore or more, the Rule 3 threshold. Micro and small enterprises are excluded from the rules. The MSME classification effective from 1 April 2025 uses the following limits:

Both the investment and turnover conditions for a category have to be considered, and export turnover is excluded for MSME classification purposes. A medium enterprise is not excluded only because it still falls within the wider MSME definition.

Step 3: Does cost audit also apply?

Cost audit operates at higher thresholds.

These tests apply as well as the basic Rule 3 test of whether the company is covered.

Example: cement manufacturer

Assume a company manufactures cement, has overall turnover of ₹60 crore and cement turnover of ₹40 crore in the preceding financial year. Assume also that it is not a micro or small enterprise. Cement is a Table B activity. The company meets the ₹35 crore cost-record threshold, so cost records are relevant. But Table B cost audit requires overall turnover of ₹100 crore or more. At ₹60 crore, that condition is not met.

Result: cost records apply, but cost audit does not apply on these figures.

What if a company has both Table A and Table B products?

ICMAI's current FAQ explains that the covered-turnover figure is the aggregate turnover of all products and services for which cost records are required under Rule 3, including products from both Table A and Table B. It is not necessary for the turnover of each table to reach ₹25 crore or ₹35 crore on its own.

ICMAI gives the example of ₹20 crore of Table A products and ₹20 crore of Table B products, with overall turnover of ₹101 crore. Aggregate covered turnover is ₹40 crore, and the FAQ concludes that products under both tables are covered by cost audit. Consider another example:

Aggregate Rule 3-covered turnover is ₹40 crore. Under the ICMAI interpretation, the company meets the ₹100 crore overall threshold and the ₹35 crore aggregate covered-turnover threshold. Subject to the remaining conditions and exemptions, cost audit extends to the relevant Table A and Table B products. That is why a multi-product company should reconcile its Rule 3-covered turnover before determining audit applicability.

Cost-audit exemptions also need to be considered

Rule 4 contains specific exemptions from cost audit, including qualifying export circumstances, Special Economic Zone (SEZ) operations and captive electricity generation. These should not automatically be applied across an entire company without examining the underlying facts.

For example, ICMAI guidance distinguishes a qualifying captive generating plant from situations where electricity is also sold outside. It also recognises that SEZ and non-SEZ operations may need different treatment. The important point is that an exemption from cost audit does not automatically remove the requirement to keep cost records.

What happens when cost audit applies?

A company covered by cost audit has to complete the steps below, using Forms CRA-2, CRA-3 and CRA-4, within the time limits shown.

The Ministry of Corporate Affairs (MCA) revised Forms CRA-2 and CRA-4 through the 2025 amendment, applicable from 14 July 2025. The cost audit and cost records rules article sets out the same steps with the dates for a 31 March year-end, who can be the cost auditor and the fines for not complying.

Cost records should not begin with the audit

A business that waits until the cost auditor is appointed to organise its cost data is usually starting too late. Useful cost records require regular capture and reconciliation of operating information such as material consumption and losses, production and capacity, employee and utility costs, inventory movements, overhead allocation, and product-level cost and margins.

When maintained properly, the same records can support pricing, profitability analysis, waste reduction and management decisions as well as statutory compliance.

In practice

A company approaching ₹35 crore turnover should not wait for the audit threshold before examining cost-record applicability. The correct sequence is:

Entity and MSME status → Covered activity → Overall turnover → Aggregate covered turnover → Cost-audit threshold → Exemptions.

That sequence avoids the common mistake of treating cost records and cost audit as the same requirement.

Before relying on this article: it follows Section 148 of the Companies Act, 2013, the Companies (Cost Records and Audit) Rules, 2014 as amended, and the consolidated rules and FAQs published by ICMAI. Whether a company is covered depends on its products, turnover and status, so check the current rules for your facts.

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