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Your company crossed ₹100 crore overall turnover last year. Your statutory auditor has asked whether you need to appoint a cost auditor. Your finance team has pulled up the Companies (Cost Records and Audit) Rules, 2014, and now they are looking at two separate tests Rule 3 and Rule 4 with different thresholds, different forms and different deadlines.
The complication is this, Rule 3 requires maintaining cost records from the first day of the financial year if you cross ₹35 crore overall turnover and fall within specified sectors.
Rule 4 requires a full cost audit if your numbers cross a higher threshold but that threshold differs depending on whether your sector is regulated or non-regulated.
Most manufacturing CFOs first need help working out which test applies to them, before even thinking about appointing a Cost Accountant.
This PKC guide walks through both rules, the four CRA forms, and what actually needs to happen step by step.
| TL;DR Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 requires maintaining cost records in Form CRA-1 once your overall turnover crosses ₹35 Cr, if your sector appears in Table A (regulated) or Table B (non-regulated) of the Rule.Rule 4 is a separate, higher test for whether you need a full cost audit: ₹50 Cr overall + ₹25 Cr product turnover for regulated sectors, ₹100 Cr overall + ₹35 Cr product turnover for non-regulated sectors.Meeting the Rule 3 threshold does not automatically trigger Rule 4. A company may need to maintain cost records without being subject to a cost audit.CRA-1 through CRA-4 are four separate compliance steps, not one filing, and each has its own deadline and consequence for missing it.Only a practising Cost Accountant registered with ICMAI can sign a cost audit report. A Chartered Accountant cannot, even if they handle your statutory audit. |
Rule 3: Which Sectors Must Maintain Cost Records and the ₹35 Cr Threshold
Rule 3 is the starting point for determining whether a company must maintain cost records under the Companies (Cost Records and Audit) Rules, 2014. This requirement is separate from cost audit applicability. A company may have to maintain cost records even when a cost audit is not required.
The rule applies to companies engaged in producing goods or providing services covered under the specified sectors in the Rules. These sectors are divided into two categories:
- Table A: Regulated Sectors: including telecommunications, electricity, petroleum products, drugs and pharmaceuticals, fertilisers, sugar and other regulated industries.
- Table B: Non-Regulated Sectors: covering various manufacturing and industrial activities, including cement, machinery, mineral products, rubber and allied products, railway equipment and other specified goods.
If the company’s overall turnover from all products and services is ₹35 crore or more in the immediately preceding financial year, it must maintain cost records for the covered products or services. The threshold applies to total company turnover, not merely the turnover generated from the product listed under Table A or Table B.
For Example: if a company has total turnover of ₹40 crore but only ₹6 crore comes from a product covered under Table B, the company can still fall within the Rule 3 cost record requirement, subject to applicable exclusions.
Micro and small enterprises, as defined under the MSMED Act, 2006, are excluded from this requirement. Applicability is also assessed annually based on the immediately preceding financial year’s turnover.
When Rule 3 applies, cost records must be maintained in Form CRA-1 throughout the financial year. This means companies should not wait until year-end to reconstruct production costs, material consumption, labour costs or overhead allocations. Maintaining these records systematically also makes any subsequent cost audit (if applicable) more efficient.
₹35 crore is the threshold for maintaining cost records, it does not automatically trigger a cost audit.
If you are unsure whether your business falls under Table A or Table B, or whether the cost audit requirements apply to your company, review the classification and turnover position before the financial year begins.
Rule 4’s Two-Tier Test: ₹50 Cr + ₹25 Cr for Regulated Sectors vs ₹100 Cr + ₹35 Cr for Non-Regulated Sectors
Rule 4 determines whether the cost records maintained under Rule 3 must also be audited by a Cost Accountant. Companies need to consider both turnover thresholds together. The applicable thresholds depend on whether the business falls under a regulated or non-regulated sector.
For Table A regulated sectors, cost audit becomes applicable when both conditions are met:
- Overall turnover from all products and services is ₹50 crore or more.
- Aggregate turnover from the specific product or service covered by the cost record requirement is ₹25 crore or more.
For Table B non-regulated sectors, both of the following must be met:
- Overall turnover is ₹100 crore or more.
- Aggregate turnover from the specific covered product or service is ₹35 crore or more.
Both thresholds must be met for cost audit to apply. Meeting the overall turnover threshold alone is not enough.
Consider a non-regulated manufacturing company with ₹120 crore overall turnover. If one covered product contributes ₹80 crore, both thresholds are satisfied and cost audit applies.
But if the same company generates only ₹30 crore from that covered product, the ₹35 crore product-specific threshold is not met. In that case, the company may still have to maintain cost records under Rule 3, but the cost audit requirement under Rule 4 would not be triggered for that product based on these figures.
For multi-product businesses this is even more important. Finance teams should therefore track both total company turnover and aggregate turnover by each covered product or service, rather than relying only on the total figure reported in the financial statements.
Certain exemptions can also apply.
Companies operating in non-regulated sectors where export revenue in foreign exchange exceeds 75% of total turnover are exempt from cost audit, subject to the conditions prescribed under the Rules.
Companies operating entirely from a Special Economic Zone (SEZ) are also exempt from the cost audit requirement. These exemptions affect the audit requirement under Rule 4 and do not, by themselves, eliminate the obligation to maintain cost records under Rule 3.
Cost audit applicability depends on two thresholds, not one. For the correct assessment, you need to check the company’s sector, overall turnover and turnover from the specific covered products or services.
Rule 4: Appointment of the Cost Auditor and Board Approval Process
When a company determines that a cost audit is applicable, the next step is to formally appoint a cost auditor.
Under Section 148(3) of the Companies Act, 2013, the audit must be conducted by a qualified Cost Accountant appointed by the Board of Directors.
The cost auditor must meet the prescribed eligibility and independence requirements under the Act and the Companies (Cost Records and Audit) Rules, 2014.
The appointment process is clear but time-sensitive:
- Board Approval: The Board of Directors must approve the appointment of the cost auditor through a Board resolution. The company should obtain the proposed auditor’s written consent and eligibility certificate before making the appointment.
- 180-day Appointment Deadline: The cost auditor must be appointed within 180 days from the commencement of the financial year. For an April to March financial year, this means the appointment should be completed within the first 180 days of that financial year.
- CRA-2 Filing: The company must intimate the Central Government through Form CRA-2 within 30 days of the Board meeting in which the appointment is made or within 180 days from the commencement of the financial year, whichever is earlier. This filing is made electronically along with the applicable fee.
- Auditor Independence: The company’s statutory auditor appointed under Section 139 cannot also conduct its cost audit. The two audits are separate functions and must remain independent.
The cost auditor’s remuneration is decided by the members as required under Section 148(3). It is not simply a management decision. Therefore, companies should check their Articles of Association and the required approvals before finalising the remuneration.
If a casual vacancy arises because of resignation, death or removal, the Board must fill the vacancy within 30 days. The appointment of the replacement cost auditor must also be intimated to the Central Government through the prescribed CRA-2 process.
Note: Do not leave cost auditor appointments until year-end. Finance teams should begin the appointment process early enough to complete the Board approval, auditor consent and CRA-2 filing within the prescribed timelines.
CRA-1: Maintaining Cost Records Correctly From Day One of the Financial Year
CRA-1 is the prescribed form in which cost records must be maintained under Rule 5 of the Companies (Cost Records and Audit) Rules, 2014.
The revised Form CRA-1 (effective from 1 April 2016) categorises the requirement into 30 headings, up from 27 in the previous version. These include:
| Category | Examples of What to Record |
| Material Cost | Receipts, issues, balances of each raw material item; valuation at purchase price including duties, taxes, freight, insurance |
| Employee Cost | Direct and indirect labour costs |
| Utilities | Power, fuel, water |
| Direct Expenses | Costs directly attributable to production |
| Fixed Assets and Depreciation | Asset registers, depreciation calculations |
| Overheads | Factory, administrative, and selling overheads |
| Transportation Cost | Inward and outward freight |
| Royalty and Technical Know-how | Payments for technology or intellectual property |
| Research and Development | R&D expenditure |
| Quality Control | Testing, inspection, quality assurance costs |
| Pollution Control | Environmental compliance costs |
| Interest and Financing Charges | Finance costs (excluding those capitalised) |
| Capacity Determination | Installed capacity, actual production |
| Work-in-progress and Finished Stock | Valuation of closing inventory |
| By-Products and Joint Products | Accounting for co-products |
| Reconciliation | Cost and financial accounts reconciliation |
| Related Party Transactions | Transactions with related parties at cost |
| Export Incentives | Duty drawback, other export benefits |
| Production and Sales Records | Quantitative details |
CRA-1 is not a one-time filing, it is a continuous record-keeping requirement. Your team needs to maintain these records throughout the financial year, not scramble to reconstruct them at year-end.
Most manufacturing companies already maintain much of this data in their ERP systems. The challenge is ensuring that the data is captured in the format and level of detail required by CRA-1. Spreadsheets and ad-hoc records are not sufficient; the MCA expects structured, auditable records.
CRA-2: Filing the Cost Auditor Appointment Notice With the MCA
After the Board appoints a cost auditor, the company must notify the Central Government through Form CRA-2. The form is filed electronically with the Ministry of Corporate Affairs (MCA).
Board approval alone does not complete the compliance process. CRA-2 filing is a separate mandatory requirement.
When Must CRA-2 Be Filed?
The company must file CRA-2 within 30 days of the Board meeting approving the appointment, or within 180 days from the commencement of the financial year, whichever is earlier.
For this reason, companies should add the CRA-2 filing to their compliance calendar as soon as the cost auditor is appointed.
What Information Does CRA-2 Require?
The form captures important details relating to the company and the cost audit assignment, including:
- Company Details: CIN, name and other relevant particulars
- Financial Year: The year for which the cost audit is being conducted
- Cost Auditor Details: Name, address and professional registration details
- Board Approval: Date of the Board meeting and appointment resolution
- Products or Services: Details of the products or services covered by the cost audit
- Sector Classification: Relevant details for determining whether the business falls under the regulated or non-regulated category
Pay Attention to Product Classification
Product classification is an area where companies need to be particularly careful. CRA-2 requires details relating to the products or services covered by the cost audit, including the relevant CETA heading, where applicable.
An incorrect classification can create inconsistencies between the company’s cost records, cost audit documents and MCA filings. Finance and compliance teams should therefore verify the product classification before submitting the form.
What Happens if the Cost Auditor Changes?
CRA-2 also applies when a casual vacancy arises because of resignation, death or removal of the cost auditor.
The Board must appoint a replacement within 30 days of the vacancy, followed by the prescribed MCA intimation for the new appointment.
Common CRA-2 Mistakes
The most common problems are easy to avoid:
- Late Filing: Treating the Board appointment as the end of the process and forgetting the separate CRA-2 filing.
- Incorrect Details: Entering incorrect auditor, product, financial year or classification information.
- Waiting until the Deadline: Delaying the filing can create unnecessary compliance pressure if corrections or additional documentation are required.
For a smooth cost audit compliance process, finalise the cost auditor early, obtain the required consent and eligibility documents, secure Board approval and complete CRA-2 within the prescribed timeline.
Do not rely on occasional MCA extensions, work towards completing the requirement by the statutory deadline.
CRA-3: What the Cost Audit Report Format Actually Requires
CRA-3 is the prescribed format for the cost audit report prepared by the Cost Auditor. It is submitted to the company’s Board of Directors under Rule 6(4) of the Companies (Cost Records and Audit) Rules, 2014.
The report provides the Board with the auditor’s observations and opinion on the company’s cost accounting records, systems and compliance with applicable Cost Accounting Standards.
When Is CRA-3 Due?
The cost auditor must submit the completed CRA-3 to the Board of Directors within 180 days from the end of the financial year. For a company following an April to March financial year, this generally means the report is due by 27 September.
CRA-3 goes to the Board first. The cost auditor does not file it directly with the MCA. The company then uses the CRA-3 report to file CRA-4 with the MCA.
The revised CRA-3 format broadly covers the following areas:
Part A: General Information
- Details of the company and cost auditor
- Cost accounting policies
- Products or services covered by the cost audit
- Other general information relevant to the audit
Part B: Manufacturing Sector
- Quantitative information
- Product-wise and unit-wise cost statements
- Material, labour, overhead and other relevant cost details
Part C: Service Sector
- Service-wise cost statements and supporting information
- Cost details relevant to applicable service activities
Part D: Other Information
- Reconciliation between cost records and financial accounts
- Related party transactions
- Auditor’s qualifications, observations or adverse remarks
- Management’s explanations or responses where required
What Does This Mean for the Finance Team?
CRA-3 is not prepared by the finance team. It is the independent report of the Cost Auditor.
However, the quality and timeliness of CRA-3 depend heavily on the underlying CRA-1 cost records.
Finance teams need to provide complete and properly supported records covering material consumption, employee costs, production, overheads, inventory, sales and other relevant information.
Any differences between the cost records and financial accounts, such as those arising from overhead allocation, by-product treatment or inter-product transfers, may need to be reconciled and explained during the audit.
CRA-1 contains the company’s cost records, while CRA-3 contains the Cost Auditor’s report on those records. Keeping CRA-1 updated throughout the year gives the Cost Auditor enough time to complete CRA-3 within the 180-day deadline and gives the company sufficient time to prepare and file CRA-4 with the MCA.
CRA-4: Filing the Cost Audit Report and Common XBRL Errors
CRA-4 is the form used to file the cost audit report with the Central Government through the MCA. After the Board receives the CRA-3 from the Cost Auditor, the company must file CRA-4 within 30 days of receiving the report.
CRA-4 is not simply a PDF upload. The filing is made in XBRL (eXtensible Business Reporting Language), which converts financial and cost information into a structured, machine-readable format that can be validated by the MCA system.
For first-time filers, XBRL preparation can be one of the more time-consuming parts of the cost audit process. The information in the XBRL instance document must agree with the underlying cost audit report and the company’s other statutory records.
Common CRA-4 Errors
Several issues can cause validation problems, delays or additional scrutiny:
- CIN and company details: The CIN, company name and other basic information must match MCA records.
- Product classification: Incorrect HSN or other product classification details can create inconsistencies in the filing.
- Mandatory fields: Leaving required XBRL fields blank can cause validation failure.
- Turnover reconciliation: Turnover reported in the cost audit records should be properly reconciled with the company’s financial and GST records.
- Inventory valuation: Differences in inventory valuation or profit reconciliation should be identified and explained.
- Capacity utilisation: Available, installed and utilised capacity should be reported accurately where applicable.
- Related party transactions: Relevant transactions must be properly disclosed.
- Digital signatures: The DSC and signing details must be valid and correctly associated with the authorised signatory.
Late or non-filing can result in additional filing fees and may also expose your company and officers in default to penalties under the Companies Act, 2013. The Cost Auditor may have separate liability for defaults attributable to the auditor.
Treat CRA-4 as the final compliance step in the cost audit cycle.
Start XBRL preparation as soon as CRA-3 is received. Reconcile the key figures with the company’s records, address the auditor’s observations, and complete the filing well before the 30-day deadline.
Where PKC Fits: Applicability Assessment, Record Readiness and Cost Audit Coordination
Not every company that maintains cost records necessarily needs a cost audit.
Determining whether Rule 3, Rule 4, both or neither apply requires reviewing your sector, product mix, overall turnover and product-specific turnover, along with any applicable exemptions. PKC can take care of this.
A statutory cost audit under Section 148 of the Companies Act, 2013, must be conducted and signed off by an eligible Cost Accountant in Practice. PKC does not perform the statutory cost audit or provide the CRA-3 sign-off.
Instead, PKC supports the work before and around the audit.
Applicability Assessment: PKC reviews your products, sector classification and turnover to determine whether you need cost records, a cost audit, or both.
CRA-1 Record Readiness: PKC reviews existing ERP and finance processes, identifies gaps and helps structure cost records so they meet applicable requirements throughout the year rather than being reconstructed at year-end.
Audit Coordination: After appointing a Cost Accountant, PKC helps your finance team prepare the required information and coordinate the handover, making the audit process more efficient.
For manufacturers with multiple products or stretched finance teams, getting applicability and record readiness right early can reduce last-minute work, improve audit efficiency and minimise compliance risks.
If your manufacturing company is approaching or has crossed the ₹35 crore, ₹50 crore, or ₹100 crore turnover thresholds and you are unsure which compliance path applies, schedule a consultation with PKC’s advisory team.
PKC’s internal audit and compliance readiness services can help you assess applicability, review your record-keeping structure, and ensure you are prepared before the cost auditor arrives.
FAQs
Which companies are covered under Rule 3 of the Companies (Cost Records and Audit) Rules, 2014?
Companies in sectors listed under Item (A) [regulated sectors] or Item (B) [non-regulated sectors] of Rule 3, with an overall annual turnover exceeding ₹35 crore in the immediately preceding financial year, are required to maintain cost records. This includes companies in manufacturing, pharmaceuticals, fertilisers, sugar, telecommunications, electricity, petroleum, steel, infrastructure, and other specified sectors.
What is the difference between the Rule 4 threshold for regulated sectors (₹50 Cr + ₹25 Cr) and non-regulated sectors (₹100 Cr + ₹35 Cr)?
For regulated sectors (Table A), cost audit is triggered at ₹50 crore overall turnover plus ₹25 crore individual product/service turnover. For non-regulated sectors (Table B), the thresholds are higher: ₹100 crore overall turnover plus ₹35 crore individual product/service turnover. Both conditions must be met in each case.
What is the difference between maintaining cost records (CRA-1) and getting a cost audit done?
Companies must maintain cost records in CRA-1 when their turnover crosses the ₹35 crore threshold under Rule 3. A cost audit under Rule 4, covering CRA-2 to CRA-4, applies only when the higher Rule 4 turnover thresholds are met. A company may need to maintain cost records without requiring a cost audit. A cost audit, however, requires cost records to be maintained first.
Can a Chartered Accountant sign a company’s cost audit report?
No. Section 148(3) of the Companies Act, 2013, read with Rule 2 of the Companies (Cost Records and Audit) Rules, 2014, requires that the cost auditor must be a Cost Accountant in Practicea person holding a valid certificate of practice under the Cost and Works Accountants Act, 1959. The company’s statutory financial auditor (who may be a Chartered Accountant) cannot serve as the cost auditor.
What are the penalties for missing CRA-2 or CRA-4 filing deadlines?
Under Section 148(8) of the Companies Act, 2013, companies may be fined between ₹25,000 and ₹5,00,000 for non-compliance. Officers in default may face additional personal fines. The MCA has also issued show cause notices for non-filing or delayed filing of Form CRA-4. Late filings attract additional fees as prescribed by the MCA.
How does PKC help manufacturers assess cost audit applicability before appointing a Cost Accountant?
PKC helps manufacturers determine whether Rule 3 (cost record maintenance) or Rule 4 (cost audit) applies to their specific situation considering their turnover, product mix, and whether their sector is regulated or non-regulated. PKC also reviews existing cost records for CRA-1 readiness and helps coordinate with a practicing Cost Accountant for the actual audit engagement. PKC does not perform the cost audit itself or sign off on CRA-3, as that legally requires a Cost Accountant in Practice.
