Learning Objectives —— After studying this chapter, you should be able to: * Understand the meaning and need of reconciliation of cost accounts and financial accounts Explain the reasons for difference in profit or loss as per cost and financial accounts Know the method of preparing a reconciliation statement or a memorandum reconciliation account ‘When cost accounts and financial accounts are maintained separately in two different sets of books, two profit and loss accounts will be prepared—one for costing books and the other for financial books. The profit or loss shown by costing books may not agree with that shown by financial books. Therefore, it becomes necessary that profit or loss shown by the two sets of accounts is reconciled. It is important to note that the question of reconciliation of cost financial accounts arises only under non-integral system. However, under the integral accounts, since cost and financial accounts are integrated into one set of books and only one Profit and Loss Account is prepared, the problem of reconciliation does not arise. Need for Reconciliation The need for reconciliation arises due to the following reasons: 1. Reconciliation reveals the reasons for difference in profit or loss between cost and financial accounts. 2. Italso helps in checking the arithmetic accuracy of the costing data. In other words, reconciliation enables to test the reliability of cost accounts. 3. It promotes coordination and cooperation between cost accounting and financial accounting departments. Reasons for Disagreement in Profit/Loss Difference in profit or loss between cost and financial accounts may arise due to the following reasons:13.2 © Reconciliation of Cost and Financial Accounts 1. Items shown only in financial accounts There are a number of items which appear in financial accounts and not in cost accounts, While reconciling, any Nes eee is category must be considered, These items are classified into three categ (a) Purely financial charges—Examples: (i) Loss on the sale of capital assets (i) Discount on bonds, debentures, etc. (iii) Losses on investments (iv) Expenses of company’s transfer office (¥) Interest on bank loans and mortgages (vi) Fines and penalties (vii) Provision for bad and doubtful debts (viii) Damages payable at law ‘3 (ix) Amounts written off, goodwill, discount on debentures, preliminary expenses (x) Loss due to theft, pilferage, etc. (b) Purely financial incomes—Examples: @ Profit arising from the sale of capital assets (ii) Rent receivable (ii) Dividend and interest received on investments (iv) Interest received on bank deposits (») Transfer fees received (vi) Income tax refund (©) Appropriations of profit—Examples: () Dividends paid (ii) Transfer to reserves (iii) Charitable donations (i) Income-tax (») Any other items which appears in Profit and Loss Appropriation Account 2. Items shown only in cost accounts There are a few items which are included in cost accounts and not in financial accounts. Examples: (@ Notional rent, i.e., charge in lieu of rent when premises are owned and no rent is payable (®) Interest on capital employed but not actually paid, i.e., the notional cost of employing capital (©) Notional salaries (d) Depreciation on fully depreciated assets still in use 3. Under-absorption or over-absorption of overheads _In cost accounts, overheads are recovered at a predetermined rate whereas in financial accounts these are recorded at actual cost. This may give rise to a difference between overheads absorbed in cost and actual overhead cost incurred, Such differences should be written off to Costing Profit and Loss Account. However, when under or over-absorbed overheads are not written off to Costing Profit and Loss Accouni, it results in the amount recovered in cost accounts being different from the actual amount shown in financial accounts. In such a case, it becomes necessary fo take into account this under/over-absorption while reconciling the two accounts.Reconciliation of Cost and Financial Accounts 013.3 'ock valuation tores accounts, ¢, 4. Different bases of st the method adopted in In cost accounts stocks are valued according to of stock in financial ‘& FIFO, LIFO, etc. On the other hand, valuation whichever is less, Diffesnn invariably based on the principle of cost or matket price, ne {WO sels of werent stock values result in some difference in profit or loss as shown by the two sets of account books, 5. Different , aa oS WES ee for depreciation The rates and methods of charging depreciation inven a ee and financial accounts, The financial accounts may follow straight : shing balance method, etc., wi ir production unit method, /hereas in cost accounts machine hour rate, xc ste., may be adopted. This will also cause a difference in the profit/ loss figures. METHOD OF RECONCILIATION The cost and financial accounts are reconciled by preparing a Reconciliation Statement or a Memorandum Reconciliation Account, The following procedure is recommended for preparing a Reconciliation Statement: 1. Ascertain the points of difference between cost accounts and financial accounts. 2. Start with the profit as per cost accounts. 3. (a) Regarding items of expenses and losses: Add: Items over-charged in cost accounts Deduct: Itemas under-charged in cost accounts For example, depreciation in cost accounts is 2,500 and that in financial accounts is 2,700. This has the effect of increasing costing profit by €200 as compared to financial profit. Then in order to reconcile, 2200 will be deducted from costing profit. (8) Regarding items of incomes and gains: Add; Items under-recorded or not recorded in cost accounts. Deduct: Items over-recorded in cost accounts For example, interest on investments received amounting to 71,500 is not recorded in cost accounts. This will have the effect of reducing profit as per cost books. Thus, in order to reconcile, this amount of 31,500 for interest should be added in the costing profit. (©) Regarding valuation of stock: () Opening Stock— Add: Amount of over-valuation in cost accounts Deduct; Amount of under-valuation in cost accounts (ii) Closing Stock— Add: Amount of undet-valuation in cost accounts Deduct; Amount of over-valuation in cost accounts 4, After making all the above additions and deductions in costing profit, the resulting figure shall be the profit as per financial books. 5. The above treatment of items will be reversed when the starting point in the Reconciliation Statement is the profit as per financial accounts or loss as per cost accounts.13.4 O Reconciliation of Cost and Financial Accounts Pro formia of Reconciliation Statement Profit as per cost accounts Add: 1, Qver-absorption of overheads Financial incomes not recorded in cost books Items charged only in cost accounts (Notional rent and interest on capital, etc.) . Over-valuation of opening stocks in cost books Under-valuation of closing stock in cost books . Under-absorption of overheads Purely financial charges Under-valuation of opening stock in cost books Over-valuation of closing stock in cost books Profit as per financial accounts ae Less: BUNS13.22 © Reconciliation of Cost and Financial Accounts Practical Questions was 730,114 whilst the net i ’s cost accounts for the year s following differences are brought to light: @ verions inthe ong. acoounts were estimated at €7,500. The charge for the year shown by the financial accounts was %6,932. (8) Director's fees not charged in the cost accounts amo\ (6) The company has allocated %600 to general provision for bad debs. ae (@ Work was commenced during the year on 4 new factory and oat of 12,000 was incurred, Depreciation of5% was provided for in the financial accounts, <= (©) Transfer fees received amounted to 28. (/) The amount charged for Income Tax %9,000. Prepare a statement reconciling the figure shown by A manufacturing company disclosed a net loss of %3,47,00' year ended 31 March 2010. The financial accounts however for the same period, The following information was reveal figure of both the sets of accounts: yunted to &750. cost and financial accounts. \0 as per their cost accounts for the disclosed anet loss of &5, 10,000 Jed as a result of scrutiny of the a (H Factory overheads under-absorbed _» sone (ii) Administration overheads over-absorbed $0,009 (iii) Depreciation charged in financial accounts 3,25,000 (iv) Depreciation charged in cost accounts e 2,75,000 (v) Interest on investment not included in cost accounts 96,000 (vi) Income-tax provided 54,000 (vii) Interest on loan funds in financial accounts 2,45,000 (viii) Transfer fess (credit in financial books) 24,000 (i) Store adjustment (credit in financial books) 14,000 (@) Dividend received 32,000 Prepare a Reconciliation Statement. (CAPE) (3. )he cost accountant ofa company has arrived a a profit of873,24,150, based on cost accounting, ~ records for the year ending 31-3-2012, As cost auditor, you find the following differences 1 between financial accounts and cost accounts. Cie hs (@ Value of WP and Finished goods: : ‘As pet financial accounts * -, 1,28,21,995 As per cost accounts : 1,31,04,220 (6) Profit on sale of fixed assets - 61,500 (©) Lois on sale of Investments .~ 11,200 (@ Voluntary retirement compensation included in salaries and wages in financial accounts 16,175,000 (©) Donation paid » 25,000 (Major repairs and maintenance written-off in financial accounts - -13,26,000 Amount in cost accounts 2 6,08,420 (g) Insurance claim relating to previous te year received during the year 14,29,000 (i) Profit from retail trading activity 7.12'300“Reconciliation of Cost and Financial Accounts 13:23 ‘You are required to prepare a reconciliation statement between the profit figures as per ‘costing and financial accounts. Calculate the profit as per financial books. (B.Com. Hons., Delhi) ‘4. Inreconciliation between cost and financial accounts, one of the areas of differences is different methods of stock valuation. State, with reasons, in eath of the following circumstances, whether costing profit will be higher or lower than the financial profit. * Cost Financial valuation valuation (@) Raw material (opening) 50,000 60,000 (©) Work-in-progress (closing) 60,000 50,000 (©) Finished stock (closing) 50,000 60,000 (@ Finished stock (opening) 60,000 50,000 (B.Com. Hons., Delhi; ICWA Inter) ‘The profit as per cost accounts is %86,250. The following points are found out on comparison between cost accounts and financial accounts: Cost accounts Financial accounts a ie z (@ Opening stock: : Materials 10,300 10,500 Work-in-progress 8,000 8,500 © Closing stock: Materials 15,000 14,200 ‘Work-in-progress 6,000 5,600 (© Dividend and interest received 7600 (@ Loss on sale of investments 1,000. (©) %,500 interest charged by Bank but not considered in Financial Accounts and also in Cost Accounts. Goodwill %2,500 and preliminary expenses €3,000 have been written-off during the year. (@) Overheads incurred %40,600 but overheads absorbed amounted to 38,500. Find out profit as per financial accounts by preparing Memorandum Reconciliation Account. ‘The profit shown in the financial accounts was €11,287 and for the same period the cost account showed a profit of €2,704. Examination of the accounts showed the. following differences: Cost accounts & Financial accounts & Depreciation 9,826 10,520 Stock valuation: Opening stock 27,510 25,500 Closing stock 18,218 18,750 Profit on sale of asset = 850 Dividend received = 2,635 Imputed rent charge 3,250 ~ ~Reconcile the profit figures. (B.Com., Delhi) C= following Profit and Loss Account draw up a Memorandum Reconciliation Account, showing the profit a per cost accous,24 0 Reconciliation of Cost and Financial Accounts Profit and Loss Account for the year ended 31-3-2012 To Office salaries To Office expenses To Salesman’s salaries To Sale expenses To Distribution expenses To Loss on sale of machinery To Fines To Discount on debentures} To Net profit 6,514 To Income tax To Reserve To Dividend To Balance c/d By Gross profit By Dividend ; By Interest on deposit By Net profit 54,648 400 150 55,198 17,936 17,936 The cost accountant of company has ascertained a profit of 719,636, as per his books. (ICWA Inter, Adapted) 8. The summarized Profit and Loss Accou int of a company for the year ended 31-3-2012 are given below: Particulars e Particulars ee Material consumed 4,4,00,000 || Sales (2,00,000 units) 100,00,000 ‘Wages 24,00,000 || Finished goods stock Factory overheads + | 14,00,000]/ C.B. (12,000 units) & 5,00,000 Admin, overheads 4. | _ 5,20,000 || Work-in-progress, C.B. Selling and distribution Materials 1,20,000 overheads x -} 4,80,000| Labour 80,000 Bad debts written-off ™ f 40,000] | Factory overheads 40,000 | 2,40,000 » Preliminary expenses written-off 60,000]| Agricultural income 32,000 Net Profit miscellaneous receipts 1,28,000 1,09,00,000 2 )) The following additional information is also furnished: ~ (a) Incdst accounts factory overheads have been absobed at 22% of prime cost. (8) Incost accounts, Admn, overheads have been absorbed at a flat rate of 83 per unit. (©) Incost accounts, selling and distribution overheads have been absorbed at 2.50 per unit. (d) Closing WIP valued by the cost dept has been incorporated in financial accounts. (€) Valuation of finished goods (C.B.) has been independently made by the financial accounts branch, You are required to prepare the cost profit and loss account and reconcile the profit as per cost profit and loss account with the profit as per financial account.13.26 O Reconciliation of Cost and'Financial Accounts The following figures have been extracted from the Financial Accounts of V Ltd for the first year of its operations: z * Direct material consumption 50,0005 Productive wages 30,000 Factory overheads 16,000 Administration overheads 7,000 Selling and distribution overheads 9,600 ol Bad debt written off 800 Preliminary expenses written off 400 Legal charges 100 Dividend received 1,000 Interest received on bank deposits 200) Sales (12,000 units) . 1,20,000 Closing stock: Finished goods (400 units) ~ 3,200 Work-in-progress 2,400 The cost accounts for the same period reveal that direct material consumption Wis, 56,000. Factory overhead is recovered at 20% on prime cost. Administration overhead is recovered at 60 paise per unit of production. Selling and distribution overheads at 80 paise per unit sold. i Prepare the Profit and Loss Accounts both as per financial records and as per cost records. Also, reconcile the profit per the two records. (CA nieryy The following information from the financial accounts is available for the year ending 31-3-2012, z Direct material consumption 2,50,000 Direct wages 1,00,000 Factory overheads 3,80,000 Administration overheads 2,50,000 Selling aind distribution overheads 4,80,000 Bad debts 20,000 Preliminary expenses (written-off) 10,000 Legal charges 5000 Dividends received 50,000 Interest on deposit received 10,000 Sales 1,20,000 units 7,00,000 Closing stock: Finished stock— 40,000 units 1,20,000 Work-in-progress 80,000 The cost account revealed: Direct material consumption %2,80,000 Factory overheads recovered at 20% on prime cost Administration overhead at 3 per unit of'production Selling and distribution overheads at %4 per unit sold Prepare (1) Costing profit and loss aécount (2) Financial profit and loss account (3) Statement reconciling the profit or loss disclosed by the costing profit and loss account and financial profit and loss account. (CA Inter). Reconciliation of Cost and Financial Accounts © 13.27 |. Given below is the Tradi eat ing and Profit and Loss Account of a company for the year ended pn a f a i To Materials 27,40,000|/ By Sales (60,000 units) 60,00,000 To Wages 15,10,000]} By i Eee a aa ’y Stock (2,000 units) 1,60,000 830,000 | By Work-in-progress gress; To Adm. expenses 3,82,400 Materials 64,000 To Selling expenses 4,50,000 Wages 36,000 To setae, expenses Factory expenses 20,000 | 1,20,000 written-o! 60,000 || By Dividend received 18,000 To Net profit 3,25,600 62,98,000 62,98,000 | aeee (Beg The company manufactures standard units. In the Cost Accounts: (i) Factory expenses have been allocated to production at 20% of prime cost; (ii) Administrative expenses at %6 per unit produced; and (iii) Selling expenses at 88 per unit sold Prepare the Costing Profit and Loss Account of the company and reconcile the same with the profit disclosed by the Financial Accounts, (CA Inter) 14, The financial profit and loss account of a manufacture company for the year ended 31 March 2012 is given below: e ie To Opening stock: By Sales |) 4,60,000 Raw materials 25,000| || By Closing stock: shed stock 40,000 Raw materials 30,000 Work-in-progress _12,500|* 77,500 || Finished stock 15,000 To Purchases 1,20,000 || Work-in-progress 20,700 To Wages (factory) 30,000 To Electric power (factory) | 65,000 | To Factory overheads 45,000 To Gross profit cfd 1,88,200 . 5,25,700 | 525,700 To Administration expenses | 20,500 | By Gross profit b/d 188,200 ToSelling and dist. expenses | 46,500 || By Misc. revenue 26,800 To Bad debts 15,600 To Net profit 132,400 2,15,000 2,15,000 | Sone The cost accounts of the concern showed a net profit of €1,32,200. It is seen that the costing profit and loss account is arrived at on the basis of figures furnished ee stock of raw materials, finished stock and work-i 290,800 Closing stock of raw materials, finished stock and work-i 69,500 You are required to prepare a Memorandum Reconciliation Account and reconcile the difference in the profit and loss account, 15. The following figures for the year ending 31 March 2012 have been extracted from the books ofa manufacturing concer: a13.28 D Reconciliation of Cost and Financial Accounts Pa Sa ea ee e E z So Se 50,000 Work-in-progress in hand: Dire be 20,000 Direct labour 600 Direct materials 10,000 Direct materials 400 Factory overheads expenses 9,500 Factory overheads 300 1,300 ‘Adininistrative overheads 5200 i Selling and distribution Finish stock-in-hand 2,700 overheads 3,800 Goodwill written-off 1500 Interest of capital 1/000 ——— Cost accounts manual states that the factory overhead cost is to be charged at 50% of direct ‘wages, administration overheads at 10% of works cost and selling and distribution overheads @Z per unit sold. The units of product sold and in hand were 4,000 and 257, respectively. (@) Find out the cost of production and the cost of sales per unit of product. (b) Prepare a statement to reconcile the costing profit and loss with the profit/loss exhibited in the financial accounts. (B.Com. Dethi; ICWA Inter) 16. From the information given below prepare (i) Statement showing costing profit or loss: and (ii) another statement reconciling the costing profit with that shown by financial accounts: ‘Trading and Profit and Loss Account for the year ended 31 December 2010 e = | To Materials consumed 1,00,000 || By Sales (1,00,000 units) 2,00,000 To Direct wages 50,000 To Indirect factory expenses | 30,000 To Office expenses 9,000 To Selling and dist.expenses] 6,000 To Net profit 5,000 2,00,000 | 2,00,000 The normal output of the factory is 1,50,000 units. Factory expenses of a fixed nature are 18,000. Office expenses are for all practical purposes constant, Selling and distribution expenses are constant to the extent of %3,000 and the balance varies with sales. () M/s Bausch Ltd. has furnished you the following information from the finan year ended 31 December 2012: Profit and Loss Account | ‘for the year ended 31-12-2012 ial books for the = © | : Opening stock of finished Sales 10,250 units 3,58,750 goods: 500 units @ %17.50each 8,750 || Closing stock of finished goods: ‘Materials consumed 1,30,000 || 250 units @ 825 each 6,250 Wages 75,000 Gross profit c/d 1,51,250 3,65,000 3,65,000 Factory overheads 47375 || Gross profit b/d 151,250 Administration overheads 53,000 || Interest 125 (Contd...)18. Reconciliation of Cost and Fi inancial Accounts O 13.29 Selling expenses 27,500 || Rent received 5,000 Bad debts 2,000 Preliminary expenses 2,500 Net profit 24,000 156,375, 156,375 The cost sheet shows: (i) the cost of materials as 713 per unit; (i/) the labour cost as $7.50 per unit; (iii) the factory overheads are absorbed at 60% of labour cost; (iv) the administration overheads are absorbed at 20% of factory bey Cost; (v) selling expenses are charged at 3 per unit; (vi) the opening stock of finished goods ig valued at 22.50 per unit. You are required to prepare: (i) The cost sheet showing the number of units elements of cost, per unit and in total, (ii) cr ait of profit or loss as per cost accounts for the year ended 31 December 2012. produced and the cost of production, by (iii) The statement showing the reconciliation of profit or loss as shown by the cost account with the profit as sho wn by the financial accounts, (CA Inter) The following is the profit and loss account of a manufacturer for the year 2012:13.30 © Reconciliation of Cost and Financial Accounts Finished products: Entire output is sold at a profit of 10% on actual cost from work-in- progress, ; Others: Wages incurred €70,000; Overheads incurred %2,50,000. ‘tems not included in cost records: Income from investments %10,000; Loss on sale of capital assets %20,000. : Draw up Stores Control Account, Work-in-progress Control Account, Costing Profit and Loss account, Financial Profit and Loss Account and Reconciliation Statement. (ICWA Inter) }) The audited financial accounts of a company showed a profit of 259,660, whereas the profits sper the cost accounts was %26,725. From the following information provided, you are required to prepare a reconciliation statement clearly bringing out the reasons for the difference between the two figures: Profit and Loss Account {for the year ended 31-3-2012 Dr Pe Cr z Opening stock 27,170,000 || Sales 34,65,000 Purchases 8,20,000 || Closing stock 7,50,000 Direct wages 2,30,000 i Factory overheads 4,05,500 Gross profit (c/d) 2,89,500, 34,65,000 34,65,000 Administrative overheads = 98,000 || Gross profit (b/d) 2,89,500 Selling overheads 1,34,340 || Dividend received 2,500 ‘Net profit 59,660. 2,92,000 2,92,000 ‘The cost records show. (i) Closing stock balance of 27,95,400. (ii) Direct wages absorbed during the year %2,18,800 (iii) Factory overheads absorbed %4,65,000 (iv) Administrative overheads absorbed @ 2.5% on sales (v) Selling overheads charged @ 5% of the value of sales. (B. Com. Hons., Delhi) ANSWERS Practical Questions 3. Profit as per financial accounts %73,80,395. Costing profit will be (a) higher, (b) higher, (c) lower, (d) lower Financial profit 276,350 Hint: 22,704 — 694 + 2,010 + 532 + 850 + 2,635 + 3,250 = 11,287 Hint: 719,636 + 400 + 150 — 200 ~ 100 ~ 1,950 ~ 5,000 — 1,000 — 4,000 = 27,936 Costing profit €13,00,000, Finished stock value in cost account €4,92,000 Costing profit £43,000, Financial profit £50,000 Financial Profit 812,900; Costing Profit 85,652. Hint: In cost accounts closing stock of finished goods is valued at %3,492, i.c., at cost of production) 12. Costing loss ¥4,22,000; Financial loss %5,35,000 (Hint: Value of closing stock in cost accounts is €2,14,000, i.., at cost of production) 13. Costing profit %3,40,646 (Hint: Value of closing stock in cost accounts is €1,72,646) 14, Hint: In cost accounts, administration expenses and bad debts have not been included, 15. Costing profit 86,000; Financial profit 73,000 16. Costing profit €15,000 17. Costing profit 824,250 18, Costing profit %18,400 19. Financial loss 716,000; Costing profit €34,000 Feename