Overview of Cost Audit in Mining Sector

Detailed insight into the cost audit process in the mining sector, including applicability, key activities, challenges, and audit observations. Exploring legal provisions, rules, and regulations governing cost accounting records and audits for companies engaged in mining activities.

• Cost Audit
• Mining Sector
• Cost Accounting
• Legal Provisions
• Compliance

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1. Presented By: CMA NIRANJAN MISHRA Date: 06th January 2024 Organised by: WIRC, The Institute of Cost Accountants of India

2. Agenda Introduction Overview Applicability to Mining Sector Forms and Annexures Key Activities Involved Approaching Cost Audit (Road Map & Practical Way) Cost Items need Special Attention Audit Observations Challenges

3. Introduction It is the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy

4. Overview The Companies (Cost Records and Audit) Rules, 2014 are applicable to every company registered under the Companies Act which are engaged in production of goods or providing of services listed in Table-A or Table-B of Rule 3. Table-A (Regulated Sector) : 6 Sector (Telecom, Electricity, Petroleum, Pharma, Fertilizer and Sugar ) Table-B (Non-regulated Sector) : 33 Sector

5. Overview of Section 148 of Companies Act (1) Cost Accounting Records (2) Audit on the basis of Turnover (3) Cost Accountant as Cost Auditor, Auditing Standards (4) Audit in addition to 143 (5) Auditors Rule are applicable and Report to BoD (6) 30 days to be submitted to CG (7) Further Information may be called (8) Default punishable u/s 147

6. Overview of other Legal Provisions Section 2(13)- Books of Accounts Section 141 Qualifications and Disqualifications Section 144- List of Prohibited Services Section 143- Powers and Duties of Auditors (14) CMA and CS also Included Section 139 Rotation of Auditors Not Applicable The Companies (Audit & Auditors) Rules 2014- Reporting of Frauds (13) and Remuneration of Cost Auditor (14)

7. Applicability Cost Accounting Records (Mining and Metallurgy) Rules, 2001 on dated 24th April 2001 only for Non-ferrous metals or minerals The Companies (Cost Accounting Records) Rules, 2011. on 3rd June 2011 for Mining Activity The Companies Cost (Record and Audit) Rules, 2014 on dated 30th June 2014

8. Applicability Cost Record Cost Audit Overall turnover from all its products and services of Rs. 35 crore or more Regulated Sector- Rs. 50 crore or more Non-regulated Sector- Rs. 100 crore or more (Both Regulated & Non-regulated Sector) Exception : SEZ, Forex Receipt 75% and CPP Mining Industry falls under Table-B i.e Non-regulated Sector Sl. No Industry/ Sector/ Product/ Service Ores and Mineral products CTA Heading 15 2502 to 2522; 2524 to 2526; 2528 to 2530; 2601 to 2617

9. Forms and Annexures FORM CRA-1: Maintenance of Cost Accounting Record FORM CRA-2: Intimation to CG for appointment of Cost Auditor FORM CRA-3: Form of Cost Audit Report along with Annexure FORM CRA-4: Submission of Cost Audit Report to Central Government

10. Forms and Annexures Part A1- General Information Part A2- General Details of Cost Auditor Part A3- Cost Accounting Policy Part A4- Product / Service Details (for the company as a whole) (Specify the product/service details separately)

11. Forms and Annexures Part B is applicable to Manufacturing Sector Part B1- Quantitative Information (for each product) Part B2- Abridged Cost Statements (for each product) Part B2A- Details of Materials Consumed Part B2B- Details of Utilities Consumed Part B2C- Industry Specific Operating Expenses ( ex:- OBR Cost & Mine Closure)

12. Forms and Annexures Part C is applicable to Service Sector Part C1- Quantitative Information (for each services) Part C2- Abridged Cost Statements (for each services) Part C2A- Details of Materials Consumed Part C2B- Details of Utilities Consumed Part C2C- Industry Specific Operating Expenses ( ex:- Programming & Broadcasting)

13. Forms and Annexures Part D1- Product and Service Profitability Statement Part D2- Profit Reconciliation (for the company as a whole) Part D3- Value Addition and Distribution of Earnings (for the company as a whole) Part D4- Financial Position and Ratio Analysis (for the company as a whole) Part D5- Related Party Transactions (for the company as a whole) Part D6- Reconciliation of Indirect Taxes (for the company as a whole)

14. Mining Industry The mining industry in India is a major economic activity which contributes significantly to the economy of India. The Gross Domestic Product (GDP) contribution of the mining industry varies from 2.2% to 2.5% only but going by the GDP of the total industrial sector, it contributes around 10% to 11%. Royalty are usually calculation based on set percentage of revenue and the percentage based on factors such as exclusivity of rights, technology and the available alternatives. DMF and NMET is collected at 30% and 2% of the Royalty respectively. Source (WIKIPEDIA)

15. Main Type of Mining Open Pit Mining/ Opencast Mining: A surface mining technique that minerals from an open pit in the ground by developing Benches. extracts Underground Mining : Mining operations carried out under the surface using shafts, slopes, tunnels or other openings.

16. Key Activities Involved Opencast Mining Particulars Underground Mining Receipt of Title of Mine Receipt of Title of Mine Assessment of Reserves (Core Drilling) Assessment of Reserves (Core Drilling) Pre-Production Activities Mine Planning Mine Planning Forest Diversification, Environmental Clearance, CTE, CTO Forest Diversification, Environmental Clearance, Access Construction, CTE, CTO Site Preparation and Bench Development Environmental Consideration Over Burden Separation Drilling & Blasting Drilling & Blasting Excavation of RoM, Breaking and Screening Production Activities Excavation, Screening and /(or) Crushing Sampling, Weighment & Transportation to Stock Yard Sampling, Weighment & Transportation to Stock Yard Stacking of Ore Exploration (Active Mine) Dispatch Stacking of Ore and Dispatch Post-Production Activities Mine Closure

17. Mine Closure Progressive It involves ongoing planning and implementation of measures to minimize environmental impact, address safety concerns, and gradually reduce the footprint of the mining operation. This phase occurs in active mining operation. Permanent/Final It involves the activities to restore the site as closely as possible to its pre-mining condition or to a condition suitable for a different land use, depending on regulatory requirements. This phase occurs when mining operation cease entirely.

18. - Labour charges - loading & unloading, - Internal transportation/ Truck or Conveyor - Depreciation Mining Assets i.e Dozer, dragline, Dumper, DG, shovel, Winder (UG) etc. - Repair & Maintenance - Consumables including explosives - Fuel and Water - Quality control Own Arrangement (Activities) Ore Raising - OB Removal and Shifting - Drilling & Blasting MO/MDO - Raising of Ore - Transport of Ore (Activities) - Grade-wise Stacking of Ore - Etc.

19. Execution- Mining Activities Cost Centres (Direct Mining, Geology, Forest, Drilling & Blasting, Sampling & QC, Maintenance, HR, Social, Admin, S & D) Cost Components Fixed and Variable Overhead (Fixed-Utilities, S&W, S&S, Depn. R &M, Watch & Ward etc.) Department Costing like Production, Geology, Forest, Mining, S&D, Personal, Security, Colony, IT, Civil, Welfare, Admin, Finance, Legal, CSR, CS, CMD office etc. Inventory Valuation Transfer Price Capacity Determination

20. Inventory Valuation Stores, spares and consumables are valued on the basis of weighted average method on the basis of quantity consumed. Finished goods are valued on the basis of weighted average method i.e the aggregate of cost of production of current year and value of opening stock of current year is divided by the aggregate of current year production quantity and opening stock quantity.

21. Transfer Price Applicable for further processing in COBP/Plant The transfer price shall be cost of production plus transportation from mine location to COBP/Plant.

22. Capacity Determination EC Budget Normal capacity Production Factors determining the capacity Exploration

23. Approaching Cost Audit- Road Map Audit Engagement Letter Organisation Chart Manufacturing Process and Process flow chart Audit Programme Cost Accounting Manual linking to the chart of accounts Cost Centres ( Operation & Service) Cost Accounting Records (Monthly, Quarterly & Annually) with Cost break-up in Fixed & Variable. Audited Annual Accounts Annual Report Internal Audit & Physical Verification Report. Budget Copy (both BE and RE) & Budgetary Control System

24. Approaching Cost Audit- Practical way Mining Plan : Mining Plan means a proposal for mining on a mining site, including a description of the systematic activities to be used for the purpose of extracting ore and minerals. Mining and EC Capacity with basis of Calculation. Mining Capacity Having capacity for mining industry means the exercise of that degree of skill, diligence, prudence and foresight that would ordinarily be expected from a skilled and experienced operator under similar circumstances, adhering to internationally recognized standards. EC Capacity Environmental Clearance (EC) for certain developmental projects has been made mandatory by the Ministry of Environment & Forests through its Notification issued on 27.01. 1994 under the provisions of Environment (Protection) Act, 1986

25. Approaching Cost Audit- Practical way Stripping Ratio in Calculation of Production, OBR- Policy. Overhead Absorption Policy Indirect Tax Reconciliation. Contracts & Agreement Mining Developer & Operator ( MDO), Mining Operator ( MO) etc. Related Party Transaction - Transaction details and basis of Transfer price Other related Issues Compliance on Previous Year Auditor s Observation.

26. Presenting Cost Audit Report Preparation of Cost Audit Report Disclosures in Cost Audit Report Presentation to the Management

27. PART-B(2) ABRIDGED COST STATEMENT : ( for each product separately) Name of Product : CTA Heading : Unit of Measurement : Finished Goods Purchased Production Qty Finished Stock Adjustment Captive Consumption Other Adjustment Quantity Sold Year Current Year Previous Year MDO Own Arrangement Amount Not Applicable Not Applicable Applicable Applicable Applicable Applicable Applicable Applicable Not Applicable Not Applicable Applicable Applicable Applicable S.L No Particulars Cost/MT Amount Cost/MT Not Applicable Not Applicable Not Applicable Not Applicable Applicable Not Applicable Not Applicable Applicable Not Applicable Not Applicable Not Applicable Applicable Not Applicable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Materials Consumed {details as per Part B ( 2A)}** Process Materials/Chemicals Utilities ( details as per Part B ( 2B) Direct Employees Cost Direct Expenses Consumable Stores & Spares Repairs & Maintenance Quality Control Expenses Research & Development Expenses Technical know-how Fee / Royalty Depreciation/Amortization Other Production Overheads Industry Specific Operating Expenses Total (1 to 13)

28. PART-B(2) ABRIDGED COST STATEMENT : ( for each product separately) MDO Own Arrangement Amount S.L No Particulars Cost/MT Amount Cost/MT 15 16 17 18 19 20 21 22 23 Increase/Decrease in Work-in-Progress Less: Credits for Recoveries Primary Packing Cost Cost of Production/Operations (14+15 to 17) Cost of Finished Goods Purchased Total Cost of production and purchases (18+19) Increase/Decrease in Stock of Finished Goods Less: Self/Captive Consumption (incl. Samples, etc.) Other Adjustments ( if any) Cost of Production/Operation of Product Sold (20+21 to 23) Administrative Overheads Secondary packing Cost Selling & Distribution Overheads Cost of Sales before Interest (24 to 27) Financing Cost Cost of Sales(28+29) Net Sales Realization (Net of Taxes and Duties) Margin [Profit/(Loss) as per Cost Accounts] (31 - 30) Not Applicable Not Applicable Not Applicable Not Applicable Applicable Applicable 24 Applicable Not Applicable Applicable Applicable Not Applicable Applicable 25 26 27 28 29 30 31 32 Applicable Not Applicable

29. Common Cost Treatment Quality Control (sampling/analysis) Weigh Bridge Railway sidings Shared services Exploration ( Core Drilling, Blasting etc.) Utilities ( Electricity, Water & Fuel) Watch & Ward

30. Cost Items need Special Attention Sponsorship Periphery Development Mine Closure Royalty, DMF, NMET

31. Audit Observations Deficiencies in Contract/Agreement Under recovery Excess payments Absorption of Exploration Cost Non cost considered as part of Cost Under/Over absorption of Overhead Non-adherence to the Mine closure plan

32. Challenges Cost Reduction ( Proper allocation and utilization of Manpower & Machineries) Government Regulations Environmental Factors Market Risk Social Commitments