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CMA Final · Cost and Management Audit · Audit of Different Service Organisations

While auditing a software services firm, the auditor notes that bench cost (salaries of employees not assigned to any client project) has been charged to specific client projects. Which audit observation is most appropriate?

The auditor should observe that bench cost is idle capacity cost and should not be charged to client projects, with its amount separately disclosed. Charging it to projects distorts project cost and profitability, and it cannot be capitalised or treated as a discount.

  1. ANo issue, since all salaries are project costs
  2. BBench cost should be treated as an abnormal or idle capacity cost and not loaded on client projects, with disclosure of its amountCorrect
  3. CBench cost should be capitalised as an asset
  4. DBench cost should be deducted from revenue as a trade discount

Explanation

Cost of unutilised capacity is not part of the cost of service delivered to a client. Loading it distorts project profitability. Capitalising or treating it as a discount has no basis in cost accounting principles.

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