Manufacturing unit audit: WIP, scrap and byproducts beyond a trading audit

A manufacturing unit audit adds three things that don't exist in a trading-company audit: valuing work-in-progress at each stage of production rather than a single purchased-goods figure, accounting for scrap and byproducts that arise incidentally during conversion and that offset the cost of the main product, and testing process loss or yield against an engineering norm to catch cases where an abnormal loss is being absorbed into cost of production instead of expensed, which understates the loss and overstates inventory at the same time.

Work-in-progress across production stages

A manufacturer's inventory sits at multiple points — raw material, WIP at each intermediate stage, and finished goods — and each stage needs its own costing, built up from the stage before it plus the conversion cost (labour and overhead) absorbed at that stage. Valuing WIP as a flat percentage of finished-goods cost, without reference to the actual stage each unit has reached, is a common shortcut that misstates the balance whenever the mix of stages shifts year to year.

1. 01Map the actual production stages and where WIP sits at eachWalk the shop floor or get the production head to walk through it — don't rely on a cost accountant's flowchart alone, since the physical process and the accounting model can drift apart over time.
2. 02Test the overhead absorption rate used for WIPConfirm the rate is based on normal capacity, not actual capacity in a low-utilisation year, which Ind AS 2 requires to avoid inflating unit cost from fixed overheads spread over fewer units.
3. 03Reconcile the physical WIP count to the costed WIP valueA physical count that differs materially from the accounting records at a specific stage usually means the stage-wise costing model has drifted from the actual process.
4. 04Check WIP ageing for stalled batchesA batch sitting in WIP for far longer than the normal cycle time is a candidate for a quality issue, an abandoned order, or an impairment the client hasn't flagged.

Scrap and byproducts

Scrap (unavoidable residue with minor value) and byproducts (secondary output with more significant, saleable value) both reduce the net cost of the main product, but by different mechanisms, and both are easy to misstate in opposite directions — scrap overstated as a credit to understate cost of production, or byproduct realisation left out of the costing entirely and booked as miscellaneous income instead.

Process loss and yield

Every conversion process has an expected normal loss — evaporation, trimming, rejection at quality control — and a well-run plant tracks this against an engineering norm. Abnormal loss, the amount above the normal norm, should be expensed in the period it occurs under Ind AS 2, not absorbed into the cost of good units, which is exactly what happens when a plant doesn't separate normal from abnormal loss in its own costing.

• Obtain the engineering or standard yield norm for each major product line and compare actual yield for the year against it.
• Where actual loss materially exceeds the norm, confirm the excess (abnormal loss) was expensed rather than spread across the cost of units produced.
• Investigate a norm that has been quietly revised upward over successive years with no operational explanation — that can be a way of reclassifying what should be abnormal loss as normal.
• Cross-check yield trends against known events during the year (equipment breakdown, a bad raw material batch) that would explain a genuine abnormal loss rather than a costing adjustment.