9

Reconciliation of Cost and Financial Accounts

9.1 INTRODUCTION

The accounting procedure adopted in financial accounts differs from those adopted in cost accounts (for example, actual amounts are considered in financial accounts, where as in cost accounts, estimated amounts are considered, stock is valued at market value or book value whichever is less in financial but in cost accounts stock is always valued at book value, etc.). Due to the difference in the procedures the profit disclosed by these accounts will differ. Therefore, it becomes necessary to reconcile these two accounts and find out the reasons for the difference.

9.2 REASONS FOR DISAGREEMENT IN PROFIT

1. Items shown only in financial accounts: There are a number of items included only in financial accounts but not in cost accounts. These may be items of income or items of expenditure. Items of expenditure decrease the profit and items of income increase the profit. For example,
   • loss on sale of assets
   • loss on investments
   • taxes on income
   • dividend paid.
2. Items shown only in cost accounts: There are certain items, which are included only in cost accounts and not in financial accounts. These items are not shown in financial accounts because the amount is not actually spend or paid.

   For example,

   • interest on own premises
   • interest on own capital
   • salary to proprietor.
3. Method of stock valuation: In financial accounts, stock is valued on the basis of its cost or market value whichever is less. In cost accounts, stock isvalued at its cost value.

4. Method of charging depreciation: In financial accounts, straight-line method or diminishing balance method, whichever accepted by the Income tax authorities is used. In cost accounts, any method whichever suitable can be used.
5. Absorption of overheads: In financial accounts, the question of absorption does not arise as the actual expenses are shown. In cost accounts, overheads are absorbed at predetermined rates which leads to either under absorption or over absorption.

Procedure for reconciliation:

There are two methods of reconciliation based on the base taken:

1. Profit as per cost account/loss as per financial account is taken as the base.
2. Profit as per financial account/loss as per cost account is taken as the base.

Rules when profit as per cost account is taken as the base

Profit as per cost accounts	xxxxx
Add:
Income considered in financial records but not considered in cost records	xxxxx
Expenses considered in cost records but not considered in financial records	xxxxx
Expenses charged less in financial records but charged more in cost records	xxxxx
Income shown excess in financial records but shown less in cost records	xxxxx
Over absorption of overheads in cost records	xxxxx
Under valuation of closing stock in cost records	xxxxx
		xxxxx
		xxxxx
Less:
Income considered in cost records but not considered in financial records	xxxxx
Expenses considered in financial records but not considered in cost records	xxxxx
Income shown excess in cost records over the financial records	xxxxx
Expenses shown excess in financial records over the cost records	xxxxx
Under absorption of overheads in cost records	xxxxx
Overvaluation of closing stock in cost records	xxxxx
Under valuation of opening stock in cost records	xxxxx
		xxxxx
Profit as per financial accounts		xxxxx

When cost profit is taken as the base, we must observe the effect of an item on cost profit. If an item increases cost profit then such item should be deducted from the cost profit and if it decreases the cost profit, it should be added to the cost profit. The same principle is applied when financial profit is taken as the base.

Items to be added and deducted are reversed if the profit as per financial account is taken as the base.

Circumstances where reconciliation statement can be avoided:

When the cost and financial accounts are integrated, there is no need to have a separate reconciliation statement between the two sets of accounts. Integration means that the same set of accounts fulfil the requirement of both i.e., cost and financial accounts.

Types of problems

1. When both the profits are given: In such cases, the sum can be done by starting with cost profit and ending with financial profit and vice versa.
2. When only one of the two profits is given: In such cases, the sum should be solved based on the profit given. If cost profit is given, then the resultant profit will be financial profit and vice versa.
3. When both the profits are not given: In such cases, cost sheet is prepared to arrive at cost profit, a combined trading, profit and loss account is prepared to arrive financial profit and then reconciliation statement is prepared as usual.

Illustration 1

From the following figures, prepare a reconciliation statement between cost and financial records:

	Rs
Net profit as per financial records	1,26,005
Net profit as per costing records	1,72,400
Works overheads under-recovered in costing	3,120
Administrative overheads recovered in excess	1,700
Depreciation charged in financial records	12,000
Depreciation recovered in costing	12,500
Interest received but not included in costing	8,000
Obsolescence loss charged in financial records	5,700
Income tax provided in financial books	42,000
Bank interest credited in financial books	750
Stores adjustment (credit in financial books)	475
Depreciation of stock charged in financial books	7,000

(Madras, 1995)

Solution:

Reconciliation statement

 

Note: The terms ‘absorption’ and ‘recovery’ are used interchangeably and they mean the same thing.

Problem 1. Ascertain the profit as per the financial books from the following information

	Rs
Profit as per cost accounts	25,000
Closing stock overvalued in cost books	12,500
Preliminary expenses written off	3,000
Profit on sale of building	30,000
Administrative expenses over-recovered in cost books	50,375
Works overheads under-recovered in cost books	30,375
Bank interest and transfer fee in financial books	5,000
Interest on investment recorded in financial books	10,000
Depreciation shown in excess in cost books	4,000
Provision made for income tax	40,000

(Madras, 1998)

[Ans: profit as per financial books = Rs 38,500]

Illustration 2

Reconciliation involving loss

Prepare a reconciliation statement from the following details:

	Rs
Net loss as per cost accounts	3,44,800
Net loss as per financial accounts	4,37,340
Depreciation overcharged in costing	2,600
Interest on investments	17,500
Administrative overheads over-recovered in costing	2,600
Goodwill written off	95,000
Stores adjustment in financial books	1,000
Depreciation of stock charged in financial books	15,000

(Madras, 1987)

Solution:

Reconciliation statement

 

Note: Incomes like interest on investments and intangible assets written off like goodwill are not shown in cost accounts in the normal course.

Problem 2. Prepare a reconciliation statement from the following information

	Rs
Net profits as per cost accounts	2,00,000
Income tax	60,000
Share transfer fee credited	4,000
Provision for doubtful debts	20,000
Overheads as per cost accounts	34,000
Overheads as per finance books	28,000
Directors’ fees in financial books only	10,000
Depreciation charged only in finance books	7,000
Closing stock in cost accounts	18,750
Closing stock in finance books	20,750
Goodwill written off	10,000
Stores adjustment (credit in finance books)	1,000
Interest on investments	4,000

(Madras, 1999)

[Ans: profit as per financial accounts = Rs 1,10,000]

Illustration 3

Prepare a reconciliation statement:

Net loss as per cost accounts	3,64,800
Net loss as per financial accounts	4,58,290
Works overheads under-recovered in costing	8,240
Depreciation overcharged in costing	4,600
Interest on investments	19,500
Administrative overheads over-recovered in costing	2,600
Goodwill written off	96,000
Stores adjustment in financial books (credit)	1,050
Depreciation of stock charged in financial books	17,000

(Madras University, 1988)

Solution:

Reconciliation statement

 

 

 

 

Problem 3. From the following figures prepare a reconciliation statement:

	Rs
Net loss as per costing records	1,72,400
Works overhead under-recovered in costing	3,120
Administrative overheads recovered in excess	1,700
Depreciation charged in financial records	11,200
Depreciation recovered in costing	12,500
Interest received not included in costing	8,000
Obsolescence loss charged in financial records	5,700
Income-tax provided in financial books	45,000
Bank interest credited in financial books	750
Stores adjustments (credit) in financial books	475
Value of opening stock in:
Cost accounts	52,600
Financial accounts	54,000
Value of closing stock in:
Cost accounts	52,000
Financial accounts	49,600
Interest charged in cost accounts but not in financial accounts	6,000
Preliminary expenses written off in financial accounts	1,000
Provision for doubtful debts in financial accounts	300

[Ans: net loss as per financial records = Rs 2,13,095]

Illustration 4

The net profit of Kamat Manufacturing Company Ltd appeared at Rs 64,337 as per financial records for the year ended 31 December 1986. The cost books, however, showed a net profit of Rs 86,200 for the same period. A scrutiny of the figures from both the sets of accounts revealed the following facts.

	Rs
Works overheads under-recovered in cost	1,700
Administrative overheads over-recovered in cost	850
Depreciation charged in financial accounts	5,600
Depreciation recovered in cost	6,250
Interest on investment not included in cost	4,000
Loss due to obsolescence charged in financial accounts	2,850
Income tax provided in financial accounts	22,000
Bank interest and transfer fee in financial books	375
Stores adjustments (credit in financial books)	237
Loss due to depreciation in values (charged in financial accounts)	3,500

Prepare a statement showing reconciliation between the figures of net profit as per cost accounts and the figures of net profit shown in the financial books.

Solution:

Statement showing reconciliation

 

 

Problem 4. The net profit of ‘A’ Co. Ltd appeared at Rs 60,652 as per financial records for the year ended 31 March 1993. The cost books, however, showed a net profit of Rs 86,200 for the same period. A scrutiny of the figures from both the sets of accounts revealed the following facts:

	Rs
Works overheads under-recovered in costing	1,560
Administrative overheads over-recovered in costing	850
Depreciation charged in financial accounts	5,600
Depreciation recovered in costing	6,250
Interest on investments not included in costing	4,000
Loss due to obsolescence charged in financial accounts	2,850
Income tax provided in financial accounts	20,150
Bank interest and transfer fee in financial books	375
Stores adjustment (credited in financial books)	237
Value of opening stock:
Cost accounts	24,800
Financial accounts	26,300
Value of closing stock:
Cost accounts	25,000
Financial accounts	23,000
Interest charged in cost accounts	2,000
Goodwill written off	7,000
Loss on the sale of furniture	1,000

Prepare statements showing reconciliation between the figures of net profit as per cost accounts and the figures of net profit as shown in the financial books.

(Madras, 1991)

[Ans: reconciliation = Rs 60,652 + 1,560 + 2,850 + 20,150 + 2,000 + 7,000 + 1,000 − 850 − 650 + 1,500 − 4,000 − 375 − 237 − 2,000 = Rs 88,600]

Illustration 5

Profit as per cost accounts is Rs 1,65,300. The following details are ascertained on comparison of the cost and financial accounts:

 

 

Find out the profits as per financial accounts and draw up a reconciliation statement.

Solution:

Reconciliation statement

 

Problem 5. A company maintains separate cost and financial accounts and the costing profit for the year 1991 differed from that revealed in the financial accounts which was shown as Rs 50,000. The following information is available:

 

 

You are required to determine the profit figure, which was shown in the cost accounts.

(Delhi, 1992)

[Ans: profit as per cost accounts = Rs 52,200]

Illustration 6

SV Ltd. has furnished you the following information from the financial books for the year ended 30 June:

Profit and loss account (ended 30 June)

 

 

The cost sheet shows the cost of materials at Rs 26 per unit and the labour cost as Rs 15 per unit. The factory overheads are absorbed at 60% of labour cost and administration overheads at 20% of factory cost. Selling expenses are charged at Rs 6 per unit. The opening stock of finished goods is valued at Rs 45 per unit.

You are required to prepare:

1. A statement showing profit as per cost accounts for the year ended 30 June.
2. Statement showing the reconciliation of profit disclosed in cost accounts with the profit shown in the financial accounts.

(Andhra University, March 2002)

Solution:

Profit as per cost accounts

	Per unit Rs	Total Rs
(Production during the year = 10,250+250−500=10,000)
Cost of materials	26	2,60,000
Labour cost	15	1,50,000
Prime cost	41	4,10,000
Factory overheads 60% of labour	9	90,000
Factory cost	50	5,00,000
Administrative overheads 20% of factory cost	10	1,00,000
Cost of production of 10,000 units × 60		6,00,000
Add: Opening stock: 500 × 45		22,500
		6,22,500
Less: Closing stock: 250 × 60		15,000
Cost of goods sold (10,250 units)		6,07,500
Add: Selling expenses at Rs 6 per unit		61,500
Total cost of units sold (10,250)		6,69,000
Profit		48,500
Sales		7,17,500
Therefore, the profit = 48,500

Reconciliation statement

 

Problem 6. ***M/s. Ashokan Ltd, made a profit of Rs 19,000 during the year 1995 as per their costing system, whereas their final accounts disclose a profit of Rs 15,000. From the following profit and loss account for the year ended 31 December 1995 as per the financial books, you are required to prepare a reconciliation statement showing the causes for this difference.

Profit and loss account

 

Costing records show the following:

1. Stock ledger closing balance Rs 89,000.
2. Direct labour Rs 23,000.
3. Factory overheads Rs 13,000.
4. Administrative overheads and selling expenses are calculated at 8% each of the selling price.

(Madras, 1992)

[Ans: reconciliation = Rs 19,000 + 3,000 + 7,500 + 2,500 − 15,000 − 2,000 = Rs 15,000]

Illustration 7

During a particular year the auditors certified the financial accounts showing a profit of Rs 1,78,000 whereas the profit as per costing books was accounted to be Rs 2,44,600. With the following information provided you are required to prepare a reconciliation statement showing clearly the reasons for the gap:

Trading and profit and loss account

 

The costing records show:

1. Book value of closing stock Rs 7,80,000.
2. Factory overheads have been absorbed to the extent of Rs 1,89,800.
3. Sundry income is not considered.
4. Administrative expenses are recovered at 3% of sales.
5. Total absorption of direct wages Rs 2,46,000.
6. Selling prices include 5% for selling expenses.

(Madras, 1991)

Solution:

Reconciliation statement

 

Working Note:

Administration overheads in cost acconts = 34,70,000 × 3%

                                                           = Rs 1,04,100

           Selling expenses in cost accounts = 34,70,000 × 5%

                                                            = Rs 1,73,500

Problem 7. Rama & Co.'s profit and loss account for the year 1985 is given below:

 

 

In cost accounts, works overheads was 50% of wages, office overheads was Rs 18,000 and selling overheads 5% on sales.

Prepare a reconciliation statement.

[Ans: profit as per cost accounts = Rs 1,67,000]

Illustration 8

S.V. Ltd, has furnished you the following information from the financial books for the year ended 31 March 1996:

Profit and loss account for the year ended 31 March 1996

 

The cost sheet shows the cost for materials at Rs 26 per unit and the labour cost Rs 15 per unit. Factory overheads are absorbed at 60% of labour cost and administration overheads at 25% of works cost. Selling expenses are charged at Rs 8 per unit. The opening stock of finished goods is valued at Rs 45 per unit.

You are required to prepare:

1. A statement showing cost and profit as per cost accounts.
2. A statement showing the reconciliation of profit disclosed in cost accounts with the profit shown in financial accounts.

(CA INTER)

Solution:

Statement showing cost and profit

 

Note:

 

Production = Sales + closing stock −opening stock

                 = 10,250 + 250 −500 = 10,000 units

Reconciliation statement

 

Problem 8. The following is the profit and loss account of ‘X’ Ltd:

 

 

The profit as per cost accounts was Rs 57,000.

You are required to prepare a reconciliation statement of the cost and financial profits using the following additional data:

1. Factory overheads in cost accounts is absorbed at 100% on wages.
2. Closing stock is valued at Rs 10,000 in costing.
3. Administration and selling overheads were recovered at 5 and 7% on sales, respectively.
4. Depreciation was charged in costing at Rs 3,000.

[Madurai, B.Com.]

[Ans: reconciliation: Rs 65,000 + 3,000 + 2,000 − 4,000 − 1,000 − 1,000 − 2,000 − 5,000 = Rs 57,000]

Illustration 9

The following figures are available from financial accounts for the year ended 31 March 1997:

	Rs
Direct material consumed	2,00,000
Direct wages	1,00,000
Factory overheads	75,000
Administrative overheads	2,25,000
Selling and distribution overheads	2,40,000
Bad debts	30,000
Preliminary expenses written off	50,000
Legal charges	20,000
Dividend received	50,000
Interest on bank deposit received	20,000
Sales (1,20,000 units)	18,50,000
Closing stock (30,000 units)	1,60,000

The cost accounts reveal the following:

Direct material consumed: 2,20,000; Direct wages: Rs 80,000; Factory overheads at 20% on prime cost; Administration overheads at Rs 2 per unit produced and selling overheads at Rs 2 per unit sold.

Prepare: (a) Statement showing cost and profit; (b) Financial profit and loss accounts; and (c) Reconciliation statement.

(Madras, 1993)

Solution:

Statement showing cost and profit

 

Trading and profit and loss account

 

Reconciliation statement

 

Problem 9. Prepare the following statements from the particulars given below:

1. Statement of cost of manufacture,
2. Statement of profit as per cost accounts,

3. Profit as per financial accounts and
4. A reconciliation statement.

	Rs
Raw materials:
Opening stock	4,000
Purchases	24,000
Closing stock	6,000
Finished goods:
Opening stock	8,000
Closing stock	2,000
Wages	20,000
Sales	79,650
Office expenses	6,100
Works expenses	7,750

Selling price = Cost + 25% (cost accounts)

As per the cost accounts, factory overheads are at 20% of prime cost and office overheads at 75% of factory overheads.

(Madras, 1995)

[Ans: (a) cost of production = Rs 46,000; (b) profit = Rs 13,275; sales = Rs 79,650; (c) profit = Rs 17,800; and (d) reconciliation = Rs 13,275 + 2,750 + 1,775 = Rs 17,800]

Hint: Stocks of finished goods are common for both accounts in the absence of information about units produced.

Illustration 10

The financial profit and loss account of a manufacturer for the year ended 31 March 1981 is as follows:

 

 

The net profit shown by the cost accounts for the year is Rs 22,270. After a detailed comparison of the two sets of accounts, it is found that

1. the amount charged in the cost accounts in respect of overhead charges are as follows: works overhead charges = Rs 11,500; office overhead charges = Rs 4,590 and selling and distribution expenses = Rs 6,640.

2. no charge has been made in the cost accounts in respect of debenture interest.
3. You are required to reconcile the profits shown by two sets of accounts.

Solution:

Statement showing reconciliation

 

 

Problem 10. Find out the profit as per the costing books and reconcile it, from the following information, with that of financial books.

 

Trading and profit and loss account for the year ended 30 June 1983

 

In cost accounts, factory overheads is at 20% of prime cost, administration overheads at Rs 5 per unit produced and selling overheads at Rs 5 per unit sold. Opening finished goods balance was the same as in financial books.

[Ans: profit as per cost accounts = Rs 1,13,700; reconciliation = Rs 80,000 + 50,000 + 5,000 + 15,000 + 6,600 − 5,000 − 15,000 − 22,900 = Rs 1,13,700]

Illustration 11

From the following data, calculate profit or loss in cost accounts as well as financial accounts and reconcile them:

	Rs
Sales	2,30,000
Purchase of materials	30,000
Closing stock	5,000
Direct wages	1,00,000
Indirect wages	5,000
Bad debts	1,500
Indirect expenses	20,000
Interest on overdraft	500
Profit on sale of assets	1,000
Selling expenses	20,000
Distribution expenses	10,000

In cost accounts

Manufacturing overheads recovered at 30% on direct wages

Selling overheads recovered	Rs 15,000
Distribution overheads recovered	Rs 7,500

(B.Com., 1993)

Solution:

Statement of cost and profit

Particulars	Rs	Rs
Purchase of materials	30,000
Less – closing stock	5,000	25,000
Direct wages		1,00,000
Prime cost		1,25,000
Factory overheads (30% on wages)		30,000
Works cost		1,55,000
Selling overheads		15,000
Distribution overheads		7,500
Cost of sales		1,77,500
Profit		52,500
Sales		2,30,000

Profit and loss a/c (financial books)

 

Reconciliation statement

 

Problem 11. Find out the profit as per the closing records and financial accounts for product X from the following information and reconcile the result:

1. Number of units produced and sold: 600 units.
2. Direct material: Rs 3,600.
3. Direct wages: Rs 3,000.
4. Selling price per unit: Rs 30.

The works on cost is charged at 80% of the direct wages and the office on cost at 25% on works cost. The actual works expenses amounted to Rs 4,500 and the office expenses Rs 3,900. There was no opening or closing stock.

(Madras, 1985)

[Ans: profit as per cost accounts = Rs 6,750; profit as per financial accounts = Rs 3,000 nil reconciliation = Rs 6,750 − 2,100 − 1,650 = Rs 3,000]

Illustration 12

The following figures were available about Ashok Engineering Company for the year ended 31 December 1990:

Particulars	Financial a/c (Rs)	Costs a/c (Rs)
Opening stock
Raw materials	6,000	5,000
Work-in-progress	7,000	6,500
Finished stock	5,000	4,500
Closing stock
Raw materials	4,000	4,300
Work-in-progress	3,000	3,700
Finished stock	5,900	6,200
Purchases	40,000
Direct wages	20,000
Indirect wages	3,000
Factory expenses	17,000	21,000 (absorbed)
Sales	1,40,000
Administration expenses	3,000	2,300 (absorbed)
Selling expenses	4,000	4,500 (absorbed)
Financial expenses	1,000
Interest and dividend received	2,500

Compute the profit in financial accounts as well as in cost accounts and prepare a reconciliation statement, showing clearly the reasons for the variations of the two profit figures.

(B.Com., 1991)

Solution:

Statement of cost and profit

	Rs
Opening stock of raw materials	5,000
Add: Purchase of raw materials	40,000
	45,000
Less: Closing stock of raw materials	4,300
Material consumed	40,700
Direct wages	20,000
Prime cost	60,700
Factory overheads	21,000
Add: Opening work-in-progress	6,500
	88,200
Less: Closing work-in-progress	3,700
Factory cost	84,500
Add: Administrative overheads	2,300
Cost of production	86,800
Add: Opening finished goods	4,500
	91,300
Less: Closing finished goods	6,200
Cost of goods sold	85,100
Selling expenses	4,500
Cost of sales	89,600
Profit	50,400
Sales	1,40,000

Profit and loss account (financial books)

 

Reconciliation statement

 

Problem 12. The profit as per the cost accounts is Rs 1,50,000. The following details are ascertained on a comparison of the cost and financial accounts:

 

 

Find out the profit as per the financial accounts by drawing up a memorandum reconciliation account.

[Srivenkateswara]

[Ans: profit as per financial accounts = Rs 1,48,000]

Illustration 13

In a factory, works overheads are absorbed at 60% of labour and office expenses at 20% of works cost. The total expenditure is as follows:

	Rs
Materials	2,00,000
Labour	1,50,000
Factory expenses	98,000
Office expenses	87,000
Total	5,38,000

Of the output, 10% is in the stock and sales total up to Rs 5,30,000. Prepare a cost sheet and a reconciliation statement.

Solution:

To prepare a reconciliation statement, it is necessary to ascertain the profit and loss account and the profit as per cost accounts, as they are not provided in the problem.

 

 

Profit and loss account

 

Reconciliation statement

 

Problem 13. Profits disclosed by a company's cost accounts for the year 1995 was Rs 50,000. The following information is available:

1. Overheads as per cost accounts were Rs 8,500 while Rs 7,000 was recorded as overheads in financial accounts.
2. Director's fees shown in financial accounts only Rs 2,000.
3. The company allocated Rs 5,000 as provision for doubtful debts.
4. Depreciation was shown as Rs 750 in financial accounts whereas in cost accounts it was shown as Rs 1,500.
5. Share transfer fees received during the year Rs 4,000.
6. Provision for income tax was Rs 20,000.

Prepare cost and financial reconciliation statements.

(Madras, 1997)

[Ans: profit as per financial accounts = Rs 29,250]

Illustration 14

A radio manufacturing company, which commenced business on 1 January 1989, supplies you with the following information and you have to prepare a statement showing the profit per radio sold. Wages and materials are to be charged at actual cost, works overheads at 80% on wages and office overheads at 20% on works cost. You are required to prepare a statement reconciling the profit as shown by the profit and loss account for the year ended 31 December 1989 with that shown in the cost accounts.

Two types of radio sets are manufactured: -Models A and B. There were no radio sets in stock or in the course of manufacture at the end of the year and the number of radio sets sold during the year were: Model A = 1,200 and Model B = 840. The particulars given are as follows:

	A (Rs)	B (Rs)
Materials per radio set	80	100
Wages per radio set	40	60
Selling price per radio set	220	325

The indirect works expenses were Rs 90,000 and the indirect office expenses were Rs 70,000.

Solution:

Statement showing total profit and profit per radio sold

 

Profit and loss account for the year ended 31 December 1989

 

Statement showing reconciling the profit shown by the profit and loss account with that shown in cost accounts

	Rs
Profit as per profit and loss account	98,600
Add: works overheads undercharged in cost accounts (90,000 – 78,720)	11,280
	1,09,880
Less: office overheads overcharged in cost accounts (71,424 – 70,000)	1,424
Profit as per cost accounts	1,08,456
Model A = Rs 37.6 × 1,200	45,120
Model B = Rs 75.4 × 840 = 63,336	63,336

Problem 14. The summary of trading and profit and loss account of a company is as follows:

 

 

The company manufactures a standard unit. In the cost accounts, factory expenses have been allocated to production at 20% of prime cost, administration expenses at 0.30 paise per unit and selling and distribution expenses at 0.40 paise per unit. The net profit shown by the cost accounts was Rs 7,100.

Prepare:

1. Control accounts for factory expenses, administration expenses, and selling and distribution expenses.
2. A statement reconciling the profit disclosed by the cost records with that shown in the financial accounts.

(Madras, 1975)

[Ans: reconciliation: Rs 6,895 + 130 + 1,000 − 375 − 300 − 250 = Rs 7,100]

Hint: In costing finished stock value was taken as Rs 2,000 to arrive at the net profit of Rs 4,100.Difference in work-in-progress valuation = Rs 250.

Illustration 15

The trading and profit and loss account of M/S XY (P) Ltd for the year ended 31 December 1982 (as prepared by the head office accounts department) is summarized as follows:

 

Trading and profit and loss account

 

Following information was also supplied:

 

Other particulars:

1. Purchased units 3,000 and manufactured units 10,000 were sold at the rate of Rs 10 each.
2. Units were purchased at Rs 8 each. Units produced by the company were valued at Rs 8 each.
3. Administrative expenditure: two-thirds to be charged to works supervision and one-third to sales supervision.
4. Divided was on trade investments.

You are required to prepare a costing profit and loss account for the year ended 31 December 1982, for submission to the higher management.

Solution:

Costing profit and loss account for the year ended 31 December 1982

 

Statement reconciling the profit as per cost accounts with the profit as per financial accounts

 

 

Working Notes:

Statement of manufacturing cost

 

Statement of units manufactured or purchased during the year

 

 

Standard cost of sales

 

 

Problem 15. From the following profit and loss account draw up a memorandum reconciliation account, showing the profit as per cost accounts:

Profit and loss account (31 December 1986)

 

The cost accountant of the company has ascertained a profit of Rs 19,636 as per his books.

[ICWA, Inter]

[Ans: reconciliation = Rs 19,636 + 600 + 400 − 1,950 − 200 − 300 − 8,000 − 1,000 − 4,000 = Rs 5,186]

Illustration 16

When profits as per financial accounts is given

The following is a summary of the trading and profit and loss account of ****Messrs. Alpha Manufacturing Co. Ltd for the year ended 31 March 2001:

 

 

The company manufactures a standard unit. In the cost accounts:

1. Factory expenses have been recovered from production at 20% on prime cost.
2. Administration expenses at Rs 3 per unit on units produced.
3. Selling and distribution expenses at Rs 4 per unit on units sold.

You are required to prepare a statement of cost and profit in cost books of the company and to reconcile the profit disclosed with that shown in the financial accounts.

Solution:

Statement of cost and profit

 

Reconciliation statement

 

[Ans: profit as per cost accounts = Rs 23,063]

Problem 16. According to the costing books of Sunlight Co. Ltd, the net profit was Rs 27,780. Prepare a reconciliation statement explaining the reasons for the differences in profits, from the following:

Profit and loss account for the year ended 31 December 1976

 

The costing records show the following:

		Rs
(a)	Closing stock	25,630
(b)	Direct wages recovered during the year	16,720
(c)	Works overheads recovered	18,560
(d)	Administration overheads charged	15,460
(e)	Selling expenses charged	740

(Madras, 1987)

[Ans: reconciliation: Rs 27,780 + 1,070 + 1,000 − 4,570 − 2,000 − 560 = Rs 22,720]

CHAPTER SUMMARY

After going through this chapter one should be able to understand the reasons for the differences in cost profit and financial profit locate the items that would appear exclusively in cost and financial accountsand understand the process of reconciling cost profit and financial profits.

KEY FORMULAE

 

EXERCISE FOR YOUR PRACTICE

Objective-Type Questions

I. State whether the following statements are true or false:

1. Cost and financial accounts are reconciled under non-integral accounting.
2. Rent on owned buildings is not included in cost accounts.
3. Income tax is provided only in cost accounts.
4. Under-absorption of production overheads is deducted while reconciling cost profit with financial profits.
5. Under valuation of closing stock in cost accounts is added while reconciling cost profit with financial profits.
6. Under absorption = actual > estimated.
7. Over absorption = actual > estimated.
8. Costing profit and loss account and financial profit and loss account are the same.
9. Capital losses shown in financial accounts are deducted while reconciling costing profits with financial profits.
10. Under absorptions are caused by clerical errors.

[Ans: 1—true, 2—false, 3—false, 4—true, 5—true, 6—true, 7—false, 8—false, 9—true, 10—false]

II. Choose the correct answer:

1. Which of the following items is include in cost accounts?
   1. Notional profit
   2. Rent receivable
   3. Transfer to general reserve
   4. None of these
2. Cost and financial accounts are reconciled under
   1. Integral system
   2. Cost-control accounts system
   3. Both a and b
   4. None of these
3. Which of the following items is not included in financial books?
   1. Loss on sale of fixed assets
   2. Interest on capital
   3. Notional rent
   4. Donations
4. Which of the following items shall be added to costing profit to arrive at financial profit?
   1. Income tax paid
   2. Interest on debentures
   3. Under absorption of overheads
   4. Rent receivable
5. When costing profit is Rs 13,500 and a charge in lieu of rent is Rs 2,000, then the financial profit should be
   1. Rs 13,500
   2. Rs 15,500
   3. Rs 11,500
   4. None of these
6. While reconciling costing profits with financial profits, under recovery of works overheads is
   1. Deducted
   2. Added
   3. Not included
   4. Doubled
7. While reconciling costing profits with financial profits, capital expenses and losses in financial accounts are
   1. Doubled
   2. Added
   3. Not included
   4. Subtracted
8. When costing loss is Rs 7,600, office overheads under absorbed being Rs 800, the loss as per financial accounts should be
   1. Rs 6,800
   2. Rs 7,600
   3. Rs 8,400
   4. None of these
9. Dividend interest on investment and discount are shown in
   1. Cost accounts
   2. Management accounts
   3. Book keeping
   4. Financial accounts
10. In cost accounts, the stock is valued at
    1. Cost
    2. Market price
    3. No value
    4. Cost plus profit

[Ans: 1 — (a), 2 —(b), 3 —(c), 4 —(d), 5 —(b), 6 — (a), 7 —(d), 8 —(c), 9—(d), 10 —(a)]

DISCUSSION QUESTIONS

Short Answer-Type Questions

1. What is reconciliation?
2. State the importance of reconciliation.
3. How do you solve the sum when both the profits are given?
4. At what situation reconciliation statement need not be prepared?
5. Give the accounting procedure when only one of the profits is given.

Essay-Type Questions

1. Why is the reconciliation of cost and financial accounts necessary?
2. State the possible reasons for difference in profits shown by financial accounts and cost accounts.
3. What are the items to be added when cost profit is taken as the base?
4. What are the items to be deducted when cost profit is taken as the base?
5. What is the accounting procedure when both the profits are not given?
6. Discuss the need for reconciliation of cost and financial accounts.
7. State briefly the treatment of under or over absorption of overheads while reconciling costing profits with financial profits.
8. How will you treat under or overvaluation of stocks in cost accounts while preparing reconciliation statement.
9. Discuss the effect of under or over charge of depreciation in cost accounts and financial accounts.

PROBLEMS

1. ‘Native’ Co. Ltd suffered a loss of Rs 25,000 as per the financial accounts. On comparison with its costing records for the same year, the following differences were observed:

   Prepare a reconciliation statement, with the help of the differences.

   	Rs
   Overvaluation of opening stock of materials in cost books	1,200
   Under valuation of closing stock of finished goods in financial books	3,000
   'Dormant’ materials written off (in financial books)	1,000
   Under absorption of overheads	4,000
   Fines levied by Municipality	500
   Debenture interest paid	2,000

   [Ans: loss as per cost accounts = Rs 15,700]

2. The profit as per cost accounts in 1987 was Rs 1,65,300. The following details are ascertained on comparison of the cost and financial accounts:

    

   

    

   You are required to draw a reconciliation statement.

   (Madras, 1986)

   [Ans: profit as per financial accounts = Rs 1,58,700]

   Profit and Loss Account and additional information given—Cost sheet and reconciliation required

3. From the following profit and loss account and additional information given, prepare: (a) a cost sheet and (b) reconciliation statement

   Profit and loss account

    

   

    

   In costing, opening materials were shown at Rs 7,000. The factory overheads were absorbed at Rs 14,000. Administration overhead charges 10% of works cost and selling overheads was 10% of sales.

    

   [Ans: profit as per cost accounts = Rs 71,900; reconciliation = Rs 70,000 + 1,000 + 1,400 + 6,000 − 2,000 − 4,500 = Rs 71,900]

   Hint: Closing materials are shown in costing at the same value as in financial accounts as it cannot be found separately.

    

4. Financial profit and loss account of a manufacturing Company for the year ended 31 March 1998 is as follows:

    

   

    

   To net profit shown by the cost accounts for the year is Rs 16,270. Upon detailed comparison of the two sets of accounts it is found that:

   1. The amounts charged in the cost accounts in respect of overhead charges are as follows: works overhead charges = Rs 11,500; office overhead charges = Rs 4,590; selling and distribution expenses = Rs 6,640.
   2. No charge has been made in the cost accounts in respect of debenture interest.

   Your are required to reconcile the profits shown by the two sets of accounts.

   (B.Com. Punjab)

   Hint: [Add: Over-absorption of administration overheads Rs 90 and S and D overheads Rs 140. Less: Under recovery of works expenses Rs 500 and debenture interest Rs 1,000]

    

5. In the reconciliation between cost and financial accounts, one of the areas of differences is different methods of stock valuation used. State with reasons, in each of the following circumstances whether costing profit will be higher or lower than the financial profit:

    

   

    

   [Ans: Items (i) and (ii) will increase the profit each by Rs 10,000 and items (iii) and (iv) will decrease the profit each by Rs 10,000]

6. A company maintains separate cost and financial accounts, and the costing profit for the year 1998 differed to that revealed in the financial accounts, which was shown as Rs 50,000.

   The following information is available:

   	Cost accounts Rs	Financial account Rs
   Opening stock of raw material	5,000	5,500
   Closing stock of raw material	4,000	5,300
   Opening stock of finished goods	12,000	15,000
   Closing stock of finished goods	14,000	16,000

   1. Dividend of Rs 1,000 was received by the company.
   2. A machine with net book value of Rs 10,000 was sold during the year for Rs 8,000.
   3. The company charged 10% interest on its opening capital employed of Rs 80,000 to its process costs.

   You are required to determine the profit figure which was shown in the cost accounts.

   (B.Com. Delhi)

   [Ans: profit as per cost accounts = Rs 43,200]

7. During the year ended 31 March 1998 a company's profit as per financial accounts was Rs 16,624. Prepare a reconciliation statement and arrive at the profit as per cost accounts using the additional information given below:

    

   

    

   The costing records show:

   1. Closing stock = Rs, 78, 197;
   2. direct wages = Rs 24,867;
   3. factory overheads absorbed= Rs 19,714;
   4. administration expenses calculated at 3% of sales; and
   5. selling expenses absorbed at 5% of sales.

   (CS – Inter)

   [Ans: profit as per cost accounts = Rs 23,063]

8. From the following figures prepare a reconciliation statement:

   	Rs
   Net loss as per costing records	1,72,400
   Works overheads under-recovered in costing	3,120
   Administrative overheads recovered in excess	1,700
   Depreciation charged in financial records	11,200
   Depreciation recovered in costing	12,500
   Interest received notincluded in costing	8,000
   Obsolescence loss charged in financial records	5,700
   Income tax provided in financial books	40,300
   Bank interest credited in financial books	750
   Stores adjustments (credit) in financial books	475
   Value of opening stock in:
   Cost accounts	52,600
   Financial accounts	54,000
   Value of closing stock in:
   Cost accounts	52,000
   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

   (CS INTER, 1997)

   [Ans: net loss at per financial records = Rs 2,08,045]

9. From the following details of Small Tools Ltd, compute the profit in financial accounts as well as in cost accounts and reconcile profit between cost and financial accounts showing clearly the reasons for the variation of the two profit figures:

    

   

    

   In cost accounts:

   Manufacturing overheads recovered at 300% on direct wages.

   Selling overheads recovered Rs 1,500

   Distribution overheads recovered Rs 700.

   (B.Com. Andhra)

   [Ans: profit as per financial accounts = Rs 11,850; profit as per cost accounts = Rs 11,300]

10. The following is the summarized version of trading and profit and loss account of Continental Enterprises Limited for the year ended 31 March 1998.

     

    

     

    During the year, 6,000 units were manufactured and 4,800 of these were sold.

    The costing records show that works overheads have been estimated at Rs 3 per unit produced and administration overheads at Rs 1.50 per unit produced. The costing books show a profit of Rs 11,040.

    Prepare a statement a cost and profit and reconcile the profit as per cost accounts and financial books.

    (B.Com, Delhi)

    [Ans: over-recovery of administration overheads = Rs 3,000; under recovery of factory overheads = Rs 4,800; over-valuation of closing stock in cost accounts = Rs 840].

11. SV Ltd. has furnished you the following information from the financial books for the year ended 31 March 1998.

    Profit and loss account for the year ended 31 March 1998

     

    

     

    The cost sheet shows the cost of materials as Rs 26 per unit and the labour cost as Rs 15 per unit. The factory overheads are absorbed at 60% of labour cost and administration overheads at 20% of factory cost. Selling expenses are charged at Rs 6 per unit. The opening stock of finished goods is valued at Rs 45 per unit.

    You are required to prepare:

    1. A statement showing profit as per cost accounts for the year ended 31 March 1998.
    2. Statement showing the reconciliation of profit disclosed in cost accounts with the profit shown in the financial accounts.

    (CAINTER)

    [Ans: (i) Rs 48,500]