RECONCILIATION OF COST AND FINANCIAL ACCOUNTS - Cost Acounting

Notes 7 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Tabeed Malpani

COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM
UNIT 5: RECONCILIATION OF COST AND FINANCIAL ACCOUNTS

INTRODUCTION
For any given period of time, usually, the results shown by Financial Statements and the Cost
Statement will not be the same. It is essential to identify the reasons for the difference in results
and reconcile the same. For ascertaining the Reasons of Difference in Profits or Losses shown by
the two different Accounting Systems, a Statement of Reconciliation or a Memorandum
Reconciliation Account is prepared.

CAUSES OR REASONS FOR DIFFERENCE IN RESULTS AS PER FINANCIAL
ACCOUNTS AND COST ACCOUNTS
The following are the reasons or causes for the differences in results as pe Financial Accounts:
1)Certain items are recorded only in Financial Accounts but not in Cost Accounts.
2)Certain items are considered only in Cost Accounts but not recorded in Financial Accounts.
3)Difference on account of Treatment for Overheads
3)Method of Depreciation
4) Method of Stock Valuation
These factors have been explained in detail as follows

Items Recorded only in Financial Accounts, but not Considered in Cost Accounts

1. Expenses and Losses
Certain items of Expenses and Losses are recorded only in Financial Accounts, but not
considered while preparing a Statement of Cost. The following are some examples of Expenses
or Loses considered only in Financial Accounts:
a) Interest on Loans (Mortgage Loans, Debentures, etc.)
b) Cash Discount allowed
c)Fines, Damages and Penalties paid for Contravention of Law
e) Donations
f) Expenses incurred for raising Capital
g) Loss on Sale of Assets
h) Loss on Sale of Investments
i)Loss on account of damage or destruction of asset due to fire accident, theft, et
j) Loss due to Scrapping of Machinery
k) Preliminary Expenses written off
l)Intangible Assets amortized or written off

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COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM
2. Incomes and Gains
Certain items of Incomes and Gains are recorded only in Financial Accounts, but not considered
while preparing a Statement of Cost. The following are some of the examples of Incomes or
Gains only in Financial Accounts:
a) Interest on Bank Deposits
b) Income from Investment
c)Rental Income
d)Transfer Fees received
e) Profit on Sale of Assets
f) Profit on Sale of Investments
g) Interest on Loans advanced
h) Cash Discount received
i)Commission received
j) Damages received

3. Appropriation of Profits
One of the uniqueness of Financial Accounting is providing for future by appropriating Profits
and creating Reserves and provisions. Such practice is not adopted in Cost Accounting. Some
examples of Appropriations found only in Financial Statements but not in Cost Statements, are
. Provision for Tax
. Proposed Dividend
. Provision for Bad Debts
. Provision for Future Losses
. General Reserves
. Any other specific reserve like Dividend Equalization Reserve, Redemption Reserve, etc.

ITEMS CONSIDERED ONLY IN COST ACCOUNTS, BUT NOT RECORDED IN
FINANCIAL ACCOUNTS
Financial Accounting considers only actual expenses incurred (with the exception of
Depreciation). However, in Cost Accounting, Notional Expenses (i.e., expenses, which are not
incurred but are likely to be incurred and Opportunity Cost (value of benefit lost of an alternative
or course of action which in not adopted) are also recorded. Some examples of items, which are
considered only in Cost Statement but not recorded in Financial Statements, are
. Notional Salary (Salary of Proprietor or Owner)
. Notional Rent (i.e., Rent for building and premises owned by Owner)
. Interest on Capital (even if the actual liability does not exist)

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COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM
1 Treatment of Overheads
In Financial Accounting, the Overheads are recorded on an actual basis. However, in Cost
Accounting Overheads are absorbed into Cost of Product or Service, based on certain
relationships. For example, Factory Overheads are absorbed as a percentage of Direct Wages,
Office Overheads are absorbed as a percentage of factory Cost, etc. On account of this, the
Overheads considered in Costing Books might be more or less than the actual amount incurred
(over-absorbed or under-absorbed). This is one of the major reasons of difference in results
shown by Financial Accounting and Cost Accounting.

2 Method of Depreciation
The reason for Difference in results between the two systems. The difference in the Amount of
would be on account of the Method of Depreciation followed. In Financial Accounting, the
method of calculating Depreciation is usually Straight-Line Method or Written-Down Value
Method whereas in Cost Accounting, it is usually the Machine Hour Rate Method.

3 Method of Stock Valuation
In Financial Accounting, Stocks are valued at Cost Price or Net Realizable Value, whichever is
less. However, in Cost Accounting, the Stocks are valued at Cost Price. On account of the
difference in Stock Valuation Policy, the results shown by Financial Statements and Cost
Statements could be different

STATEMENT OF RECONCILIATION
A Statement of Reconciliation or Reconciliation Statement is a Statement prepared to present the
reasons for difference in results under the two Accounting Systems, thereby enabling the
accuracy of both the systems and transparency in recording of business transactions

MEMORANDUM RECONCILIATION ACCOUNT
Memorandum Reconciliation Account is an alternative to Statement of Reconciliation. It is
prepared to present the reasons for difference in the results shown by Financial Statements and
Cost Statements. The account is not a part of Double Entry System. Hence, it is called
Memorandum Reconciliation Account

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COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM

PROBLEMS
Problem 1
The Net Profit of a manufacturing company appeared as Rs64,500 as per Financial Records for
the year ended 31
st
March 2018. The Cost Books, however, showed a Net Profit of Rs86,460 for
the same period. A careful scrutiny of the figures revealed the following facts:
Income Tax provided in Financial Books 20,000
Bank Interest credited in Financial Books 250
Works Overhead under-recovered 1,550
Depreciation charged in Financial Accounts 5,600
Depreciation recovered in Costing Books 6,000
Administrative Overheads over-recovered 850
Loss due to Obsolescence charged in Financial Accounts 2,800
Interest on Investments not included in Cost Accounts 4,000
Stores Adjustment (credited in Financial Books) 240
Loss due to Depreciation in Stock Values charged in Financial Books 3,350
Prepare a Reconciliation Statement

Problem 2
The Net Profit of Buddha Engineering Company appeared as Rs1,28,755 as per Financial
Records for the year ended 31
st
March 2018. The Cost Books, however, showed a Net Profit of
Rs1,72,400 for the same period. A scrutiny of the figures revealed the following
Works Overhead under-absorbed 3,120
Administration Overheads recovered in excess 1,700
Depreciation as per Cost Books 12,500
Depreciation as per Financial accounts 11,200
Interest on Investments not included in Cost Accounting 8,000
Income tax provided in Financial Accounts 40,300
Loss due to Obsolescence shown in Financial Accounts 5,700
Bank Interest and Transfer Fees credited in Financial Accounts 750
Credit for Stores Adjustment in Financial Records 475
Loss on account of fire accident, charged in Financial Accounts 6,750
Prepare a Memorandum Reconciliation Account

Problem 3
Prepare a Reconciliation Statement from the following information
Net Loss as per Cost accounts 3,44,800
Net Loss as per Financial Accounts 4,32,090
Works Overhead under-recovered in Cost Accounts 6,240
Depreciation overcharged in Cost Accounts 2,600
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COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM
Administration Overheads recovered in excess 3,400
Interest on Investments 17,500
Goodwill written off 11,400
Income Tax paid 80,600
Stores Adjustment credited in Financial Books 950
Loss on Damaged Stock shown in Financial Accounts 13.500

Problem 4
The Net Profit of ARM Engineering Company appeared as Rs75,970, as per Financial Records
for the year ended 31
st
March 2018. The Cost Books, however, showed a Net Profit of Rs75,400
for the same period. The difference was due to the following:
The Closing Stock of Finished Goods in Financial Books was valued at 14,500, while the same
in Cost Books was 14,100. The Stores Adjustment credited in Financial Books was Rs 570, The
Work in Progress in Financial Books was valued at 9,600 and in Cost Books at 10,000.
Prepare a Statement of Reconciliation.

Problem 5
From the following figures, prepare a Reconciliation Statement and determine financial profit
Net profit as per costing books 66,760
Factory overhead under-recovered in costing 5,700
Administration overhead recovered in excess 4,250
Depreciation charged in financial books 3,660
Depreciation recovered in costing 3,950
Interest received but not included in costing 450
Income-tax provided in financial books 600
Bank interest credited in financial books 230
Stores adjustment (credited in financial books) 420
Depreciation of stock charged in financial accounts 860
Dividends appropriated in financial accounts 1,200
Loss due to theft and pilferage provided only in financial books 260

Problem 6
A manufacturing company disclosed a net loss of Rs. 3,47,000 as per their cost accounts for the
year ended March 31, 2004. The financial accounts however disclosed a net loss of Rs. 5,10,000
for the same period. The following information was revealed as a result of scrutiny of the figures
of both the sets of accounts
Factory overheads under-absorbed 40,000
Administration overheads over-absorbed 60,000
Depreciation charged in financial accounts 3,25,000
Depreciation recovered in cost accounts 2,75,000
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COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM
Interest on investments not included in cost accounts 96,000
Income-tax provided 54,000
Interest on loan funds in financial accounts 2,45,000
Transfer fee (credit in financial books) 24,000
Stores adjustment (credit in financial books) 14,000
Dividend received 32,000
Prepare a statement showing reconciliation between the figure of net loss as per cost accounts
and the figure of net loss shown in the financial books.

Problem 7
Find out the Profits as per Costing Records from the information given.
Profits as per Financial Records: 1,58,500
The following details are ascertained on comparison of Cost and Financial Accounts:
Opening Stock of Material in Cost Accounts 32,600
Opening Stock of Material in Financial Accounts 33,000
Opening Stock of Work in Progress in Cost Accounts 20,000
Opening Stock of Work in Progress in Financial Accounts 19,000
Closing Stock of Material in Cost Accounts 36,000
Closing Stock of material in Financial Accounts 34,400
Closing Stock of Work in Progress in Cost Accounts 16,000
Closing Stock of Work in Progress in Financial Accounts 16,200
Interest remitted but ignored in Cost Accounts 800
Interest charged but not considered in Financial Accounts 6,000
Preliminary Expenses written off 13,000
Overhead Expenses charged in Financial Accounts 1,21,000
Overheads recovered in Cost Accounts 1,26,000

Problem 6
From the following particulars, prepare a Memorandum Reconciliation Account and find out the
Loss as per Financial Records:
Net Loss as per Cost Accounting 1,72,400
Works Overhead under-recovered 3,120
Administration Overhead over-recovered 1,700
Depreciation charged in Financial Accounts 11,200
Depreciation recovered in Cost Accounts 12,500
Interest received not included in Cost Accounts 8,000
Loss on Sale of Assets shown in Financial Accounts 5,700
Income Tax provided in Financial Books 40,300
Bank Interest credited in Financial Books 750
Value of Opening Stock in Cost Accounts 52,600
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COST ACCOUNTING

Reconciliation of Financial and Cost Accounts Sushmitha V
Asst Professor,
MESIOM
Value of Opening Stock in Financial Accounts 54,000
Value of Closing Stock in Cost Accounts 52,000
Value of Closing Stock in Financial Accounts 49,600
Interest charged in Cost Accounts but not in Financial Accounts 6,000
Preliminary Expenses written off in Financial Accounts 800
Provision for Doubtful Debts in Financial Accounts 150
Stores Adjustment credited in Financial Books 475

Problem 7
The financial profit and loss account of a mfg co. for the year ended 31
st
march 2018 is as
follows:
Particulars
Amount
Particulars
Amount
To materials used
50,000
By sales
1,24,000
To carriage inwards
34,000

To factory expenses
12,000

To direct wages
1,000

To administration expenses
4,500

To selling expenses
6,500

To debenture interest
1,000

To net profit
15,000

1,24,000

1,24,000

The amounts charged in Cost Accounts are as follows:
Factory OH Rs 11,500
Office OH Rs 4,590
Selling OH Rs 6,640
No charge has been made in Cost Accounts in respect of debenture interest. Prepare a statement
of cost and reconcile the profits as per financial accounts with that of cost accounts.
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