Cost Records Reconciliation of Cost and Financial Accounts

14.1 ORGANISING COST ACCOUNTS

Independent Accounts
Where cost and financial transactions are kept separate, the system is called Cost
Ledger Accounting as the cost ledger is the principal book of accounts. The alternative
name is non integrated accounting.
Where separate costing books are maintained, it is desirable to maintain the entire
transactions on double entry system, so that arithmetical accuracy is established.
Integrated Accounts
Where cost and financial transactions are integrated, the system is called Integrated
Accounting. In other words, it refers to a single system, which contains both cost and
financial records.
It should be possible to prepare Profit and Loss account and Balance Sheet so as to satisfy the
statutory requirements. Under this system, there is no need for a separate cost ledger. But, there
should be a number of subsidiary ledgers like stores ledger, job ledger and sock ledger. Control
accounts are also maintained for each one of them in the financial ledger.
14.2 COST RECORDS
The following are important cost records:
Stores Ledger: Stores ledger contains individual accounts for each item of raw materials, stores
and consumable stores. Receipts are posted on the basis of Goods Receipt Note. Issues are
posted on the basis of Stores Requisition slips. So, both receipts and issues are, individually,
posted into each account, while the totals of receipts and issues are posted into the Stores control
account, maintained in the cost ledger. The total of individual accounts in the stores ledger
should agree with the balance in the Stores control account, maintained in the cost ledger.

Where the firm is maintaining bin card arrangement and following perpetual
inventory system, the accounts maintained in the stores ledger provide counter check to
verify the correctness of physical stock as well as balances in bin cards.
Stock Ledger or Finished Goods Ledger: This contains individual accounts of all types
of finished goods. Finished Goods Control Account is maintained in the cost ledger.
Work-in-Progress Ledger: Work-in-progress is that stage which is in between raw
materials and finished goods. This contains accounts of various jobs. Each job, unit or process is
given a separate account number. Concerned control account is maintained in cost ledger.
Expenses or Overheads Ledger: Overheads ledger contains accounts relating to
individual expense items such as salaries, rent, insurance, stores consumed, packing charges etc.
Overheads are classified under three heads such as factory overheads, administration overheads
and selling and distribution overheads. The ledger may be subdivided into three sections and
relevant accounts under each head are maintained in each section. Concerned control accounts
for each section are maintained in the cost ledger.
Cost ledger : cost ledger is similar to general ledger in the financial accounting. This is
the principal book for cost accounts. It contains all control accounts of the subsidiary ledger
such as stores ledger, stock ledger, job ledger, (work in progress ledger) and expanses or
overheads ledger. In the other words, it would contain stores control account, administration
expenses overheads control account, selling and distribution expenses overheads control account
etc. The cost ledger would contain appropriate control accounts for each of the subsidiary ledger
for self balancing. It would also contain financial ledger control account.
The accounting department is interested in personal accounts, real accounts, and nominal
accounts, while the costing department is concerned with the accounts relating to expenditure
and income only.
14.3 RECONCILIATION BETWEEN COST AND FINANCIAL RECORDS
Need for reconciliation: in those concerns, where there are no separate cost and financial
accounts, the problem of reconciliation does not arise. But where cost and financial accounts are
maintained independent of each other, it is imperative that accounts are reconciled. Both sets of
books are concerned with the same basic transactions. However, the figure of profit disclosed by
the cost accounts does not agree with that disclosed by the financial accounts. Thus,

reconciliation between the results of the two sets of books is necessary due to the following
reasons:
(A)

To find out the reasons for the difference in the profit or loss in cost and financial

(B)

accounts.
To ensure the mathematical accuracy and reliability of both the books of accounts.

14.4 REASONS FOR DISAGREEMENT IN PROFIT

The following causes disagreement between the costing and financial profit:
1. Items showed only in financial accounts: there are a number of items, which are included
in financial accounts but find no place in cost accounts. These may be items of
expenditure or appropriation of profit or items of income. The former reduces the profit,
while the latter have the reverse effect. The item may be classified as under:
(a) Purely financial charges: examples
(i)
Loss arising from the sale of fixed assets
(ii)
Loss on investments,
(iii)
Discount on debentures
(iv)
Interest on bank loan, mortgages, and debentures
(v)
Expenses of the companys share transfer office.
(b) Appropriation of profit: Examples
(i) Donations and charities,
(ii) Income tax,
(iii) Dividend paid,
(iv) Transfers to reserves and sinking funds,
(v) Amounts written off (goodwill and preliminary expenses).
(c) Purely financial incomes: Examples
(i) Rent,
(ii) Profits on the sale of fixed assets,
(iii) Transfer fees received,
(iv) Interest received on bank deposits,
(vi)
Dividend received.
2. Items showed only in Cost Accounts: There are certain items, which are included in
cost accounts but not in financial accounts. These items are very few and usually are
notional charges. For example, interest may be calculated on capital employed in
production to show the notional cost of employing the capital, through, in fact, no interest
has been paid. Similarly, production may be charged with a nominal rent for premises

owned to enable the concern to compare its cost of production, with that of a rented
factory.
3. Over or under Absorption of Overhead: Overhead absorbed in cost accounts on the
basis of estimation like percentage on direct materials, percentage on direct wages, etc.
may be more or less than the actual amount incurred. If the overheads are not fully
absorbed (the amount in cost accounts is less than the actual amount), the shortfall is
called under absorption. On the other hand, if overhead expenses in cost accounts are
more than the actual amount, this is a case of over absorption. Thus, under or over
absorption of overheads leads to difference in two accounts. Sometimes, selling and
distribution expenses are ignored in cost accounts, altogether. In such a case, costing
profit would be higher than the profit shown in the financial records. This requires
reconciliation.
4. Differences due to different basis of Stock Valuation and Depreciation: The basis
adopted for valuation of work-in-progress, stores, finished stock may differ in these two
sets and that may cause disagreement in the results. For example, stock is valued on cost
or market value, whichever is less, in financial books and weighted average basis is
followed in the cost accounts. The difference in treatment may cause variation. Similarly,
using fixed installment in one set and diminishing balance method of depreciation in the
other may cause difference, requiring reconciliation.
14.5 PROCEDURE OF RECONCILIATION
When there is a difference between the profits disclosed by cost accounts and financial
accounts, the following steps shall be taken to prepare a Reconciliation statement:
I.

Ascertain the various reasons of disagreement, detailed above, between the profits

II.

disclosed by two sets of books of accounts.

If profits as per cost accounts are taken as the base:

ADD:
(i)
(ii)

Items of income included in financial accounts, but not in cost accounts.

Items of expenditure (as interest on capital, rent on owned premises etc.)

(iii)

included in cost accounts, but not in financial accounts.

Amounts by which items of expenditure have been shown, in excess in cost
accounts as compared to the corresponding entries in financial accounts.

(iv)

Amounts by which items of income have been shown, in excess in financial

(v)
(vi)

accounts as compared to the corresponding entries in cost accounts.

Over absorption of overheads in cost accounts.
The amount by which closing stock of inventory is undervalued in cost

(vii)

accounts.
The amount by which the opening stock of inventory is overvalued in cost
accounts.

DEDUCT:
(i)
(ii)
(iii)

Items of income included in cost accounts not in financial accounts.

Items of expenditure included in financial accounts but not in cost accounts.
Amounts by which items of income have been shown in excess in cost accounts over

(iv)

the corresponding entries in financial accounts.

Amounts by which items of expenditure have been shown, in excess in financial

(v)
(vi)
(vii)

accounts over the corresponding entries in cost accounts.

Under absorption of overheads in cost accounts.
The amount by which closing stock of inventory is overvalued in cost accounts.
The amount by which the opening stock of inventory is undervalued in cost accounts.

After making all the above additions and deductions, the resulting figure will be profit as per
financial accounts.
Note: There may be occasions that the amount taken in the base accounts is loss. In such an
event, reverse procedure is to be adopted. In other words, what has been added above is to be
deducted, while what is shown as deduction should be added.
If profits as per financial accounts are taken as the base, then items added shall be deducted
and items to be deducted shall be added i.e. the procedure shall be reversed.
14.6 TIPS FOR RECONCILIATION
If the following tips are followed, it is easy to prepare the reconciliation statement.
1. Taking one as base (say, Profit in cost records), we have to arrive at profit as per financial
records.
Think what has been the impact of the transaction on profits, taken on the base. If the
transaction has resulted in more profits to the base, deduct. In case, the transaction has
created less profit, simply add.

2. Answer can be checked. Profit figure of both the books is given in the question so check
whether the figure arrived is tallying with or not. If tallied, fine. If not, verify again,
which item has been added instead of deducting or vice versa.
14.7 TREATMENT FOR CERTAIN ITEMS
There are certain items, which may appear in both cost accounts and financial accounts,
such as depreciation. But, there may be difference in the amount. In such a case, the
difference amount only is to be adjusted from the base amount.
Illustration No. 1
From the following information recorded in the books of Tushil & Co. for the year ending
31st Dec, 2008, prepare a Reconciliation Statement.
RS
(i)
(ii)
(iii)
(iv)

Profit as per cost books

Overheads over-recovered in cost books
Loss not shown in cost books
Under valuation of opening stock in cost books

84,000
4,350
5,850
3,500

Find out profit as per financial books?

Solution:
Profit in the financial books of Tushil & Co for the year ending 31st Dec, 2008.
Add:
(i)
(ii)

Profit as per cost books

Overheads over-recovered in cost books

84,000
4,350
88, 350

Less
(iii)
(iv)

Loss not shown in cost books

Under valuation of opening stock in cost books

Profit as per financial books

5,850
3,500
9,350
79,000

Illustration No. 2
M/s Della Traders have furnished the following information from financial books for the year
ended 30th June, 2008.
Trading and Profit and Loss A/c for the year ended 30th June, 2008


The cost sheet shows the following:
(a)
(b)
(c)
(d)
(e)

Cost of materials at Rs. 26 per unit and Labour cost Rs. 15 per unit produced.
Factory overheads are absorbed at 60% of Labour cost.
Office overheads are absorbed at 20% of Factory cost.
Selling expenses are charged at Rs. 6 per unit.
Opening stock of finished goods is valued at Rs. 45 per unit and closing stock as in
financial books.

You are required to prepare:

(i)

A statement showing cost and profit as per cost accounts for the year ended 30th June,

(ii)

2008 and
Statement showing the reconciliation of profit disclosed in cost accounts with the
profit shown in financial accounts.

Solution:
Cost Sheet of Della Traders for the year ending 30th June, 2008
.
Units produced = Sales + Closing stock Opening stock
= 10,250 + 250 500
= 10,000 units
Reconciliation Statement
.
Illustration No. 3
The net profit Sudhir & Co. Ltd. appeared at Rs. 50,052 as per financial records for the year
ending 31st March, 2008. The Cost Books however, showed a net profit of Rs. 86,200 for the
same period. Examination of the figures from both the sets of accounts has shown the following
facts: