Reconciliation of Cost and Financial Accounts
1. Meaning of Reconciliation:
Where cost accounts and financial accounts are separately maintained in two different sets of books, the profit or loss shown by one may not agree with that shown by other. Therefore, it becomes necessary that periodically the profit or loss shown by the two sets of accounts is reconciled.
A memorandum of reconciliation is prepared showing the reasons for difference between the results disclosed by each system. It is done to check the arithmetical accuracy of both sets of accounts as well as to detect mistakes committed in the accounts.
2. Need for Reconciliation:
(a) It reveals the reasons for difference in profit or loss between cost and financial accounts.
(b) It ensures that no income or expenditure item has been omitted to record and there is no under- or over-recovery of overheads.
(c) It helps in checking the arithmetical accuracy of both the sets of accounts.
(d) It ensures the reliability of cost accounts in order to correct ascertainment of cost of production.
(e) It facilities internal control by highlighting the variations causing increase or decrease in profit.
(f) It promotes co-ordination and co-operation between cost and financial accounting departments in order to generate correct and reliable accounting data.
(g) It enables management to formulate policies regarding overheads, depreciation and stock valuation.
(h) It ensures managerial decision-making.
3. Reconciliation Procedure:
The cost and financial accounts are reconciled by preparing a Reconciliation Statement or a Memorandum Reconciliation Account.
(a) Reconciliation Statement:
The same principles of bank reconciliation will apply here. One may start with the profit shown by one set of accounts (usually cost accounts) as base profit and items which do not tally are either added to it or deducted from it to get the profit shown by other set of accounts (i.e., financial accounts).
The treatment of items will be reversed if the starting point in the reconciliation statement is the profit as per financial accounts.
A proforma of reconciliation statement is shown below:
Note: In case of Loss, the amount shall appear as a minus item.
(b) Memorandum Reconciliation Account:
Here the reconciliation procedure is in the form of an account. The profit as per cost accounts is the starting point and is shown on the credit side of this account. All items which are added to costing profit for reconciliation are also shown on credit side.
The items to be deducted from costing profit for reconciliation are shown on the debit side. The balancing figure gives the profit as per financial accounts. It is only a memorandum account and does not form part of double entry system of book-keeping.
4. Practical Problems on Reconciliation of Cost and Final Accounts:
1. From the following data, prepare a Reconciliation Statement to find out profit as per Financial Accounts:
2. From the following data, prepare a Reconciliation Statement:
3. Prepare a Reconciliation Statement from the following data:
4. Gain More Ltd. showed a net loss of Rs. 6,30,000 as per Financial Accounts for the year ended 31 March 2011.
The Cost Accounts, however, disclosed a loss of Rs. 5,00,000 for the same period. On scrutiny of the two accounts the following are available:
5. From the following information, prepare a Reconciliation Statement:
6. Prepare a Memorandum Reconciliation Account from the following details:
Profit as per cost accounts were of Rs. 60,000 while the profits as per financial accounts were of Rs. 59,700.
The value of opening and closing stock as shown in cost accounts and financial accounts were as under:
7. In a factory works overhead are absorbed @ 60% of labour and office expenses @ 20% of works cost. The total expenditure is as follows:
8. From the following information prepare:
(a) Profit and Loss A/c,
(b) Cost Sheet,
(c) Reconciliation Statement
9. Following is the certified Financial Accounts of K. Ltd.
The costing records show:
(a) Profit as per cost records Rs. 24,000
(b) Book value of closing stock Rs. 78,000
(c) Factory overhead has been absorbed to the extent of Rs. 18,980
(d) Sundry income is not considered
(e) Administration overheads are recovered to the extent of 3% of selling price
(f) Total absorption of direct wages Rs. 24,600
(g) Selling price includes 5% for selling expenses.
10. The Trading and Profit and Loss A/c of ABC Ltd. for the year ended 31-12-10 were as follows:
The following information was available from the Cost Accounts:
(i) Closing stock of goods—Rs. 4,000
(ii) Manufacturing overhead was applied @ 150% on direct wages
(iii) Administrative, selling & distribution expenses were 10% of sales,
(iv) Depreciation charged Rs. 2,400
You are required to reconcile the profit of Financial Accounts with that of the Cost Accounts.
11. M/s Rana Traders have furnished the following information from the financial books for the year ending 31st March, 2011
The cost sheet shows the following:
(a) Cost of materials at Rs. 26 per unit and labour cost Rs. 15 per unit.
(b) Factory overheads are absorbed at 60% of labour cost
(c) Office overheads are absorbed at 20% of factory cost
(d) Selling expenses are charged at Rs. 6 per unit sold, and
(e) Opening stock of finished goods is valued at Rs. 45 per unit.
You are required to prepare:
(i) A statement showing the cost and profit as per Cost Accounts for the year ended 31st March, 2011
(ii) A statement showing the reconciliation of profit disclosed in Cost Accounts with the profit shown in Financial Accounts.
Production (in units) = Sales (units) + Closing Sock (units) – Opening Stock (units)
= 10,250 + 250 – 500 = 10,000 units.