Cost Accounting - Reconciliation of Cost and Financial Accounts

 

COST ACCOUNTING

Reconciliation of

Cost and Financial Accounts

Part A: Presentation of formats of basic statements covering all the necessary details

Part B: Four Illustrations with Solutions

Part A

Statement showing reconciliation between cost and financial accounts

Particulars	Rs	Rs
Profit as per cost accounts
ADD:
(i)  Over-recovery of overheads / Over-absorption of overheads        /Over-application of overheads
(ii)  Items of incomes not recorded in cost accounts (i.e. purely financial incomes, e.g. interest income, dividend income, rent income, profits on sale of fixed assets, profits on investments, transfer fees, etc.)
(iii) Expenses not charged in financial accounts (i.e. expenses charged in cost accounts only, e.g. notional rent of own building, notional    interest on own capital, etc.)
(iv) Difference in the value of stock [(+A) as per working note          below]
LESS:
(i) Under-recovery of overheads / Under-absorption of                     overheads / Under-application of overheads
(ii)  Expenses not charged in cost accounts (i.e. expenses charged in financial accounts only, e.g. interest on bank loan, interest on debenture, expenses and discount on issue of shares/debentures, losses on sale of fixed assets, losses on investments, fines, penalties, bad debts, goodwill written off, preliminary expenses written off, loss by fire, income tax, donation, subscription, legal charges, etc.)
(iii) Difference in the value of stock [(−A) as per working note          below]
Profit as per financial accounts

 

Working note:

Computation of stock adjustment due to difference in valuation

Particulars	Closing Stock (Rs)	Opening Stock (Rs)	Increase in Stock (Rs)
(1)	(2)	(3)	(4) = (2 − 3)
As per financial accounts	×××	×××	×××
LESS: As per cost accounts	×××	×××	×××
	×××	×××	××× (± A)

 

Part B

 

Illustration: 1

During a particular year, the auditors certified the financial accounts; showing profit of Rs 1, 68,000 whereas the same, as per the costing books of accounts was coming out to be Rs 2, 40,000. Given the following information, you are asked to prepare a Reconciliation Statement showing the reasons for the gap.

 

Trading and Profit and Loss Account

Particulars	Rs	Particulars	Rs
To Opening stock	8,20,000	By Sales	34,65,000
To Purchases	24,72,000	By Closing stock	7,50,000
To Direct wages	2,30,000
To Factory overhead	2,10,000
To Gross Profit c/d	4,83,000
	42,15,000		42,15,000
To Admn expenses	95,000	By Gross Profit b/d	4,83,000
To Selling expenses	2,25,000	By Sundry Income	5,000
To Net Profit	1,68,000
	4,88,000		4,88,000

 

The costing records show:

i.         Book value of closing stock Rs 7, 80,000.

ii.        Factory overheads have been absorbed to the extent of Rs 1, 89,800.

iii.      Sundry income is not considered.

iv.      Total absorption of direct wages Rs 2, 46,000.

v.       Administrative expenses are covered at 3% of selling price.

vi.      Selling prices include 5% for selling expenses.

 

Solution: 1

Illustration: 2

The following is the Trading and Profit and Loss account of M/s. Time and Trading limited for the year ended 31.12.2016.

 

Trading and Profit and Loss Account

Particulars	Rs	Particulars	Rs
To Materials consumed	7,08,000	By Sales (30,000 units)	15,00,000
To Direct wages	3,71,000	By Closing stock of Finished     Goods (1,000 units)	40,000
To Works overhead	2,13,000	By Work-in-progress:
To Admn overhead	95,500	Materials	17,000
To S and D overhead	1,13,500	Wages	8,000
To Net Profit	69,000	Works overheads	5,000
	15,70,000		15,70,000

 

Manufacturing a standard unit, the company’s cost records show that:

i.      Works overheads have been charged to works cost at 20% on prime cost.

ii.        Administration overheads have been recovered at Rs 3 per finished unit.

iii.      Selling and distribution overheads have been recovered at Rs 4 per unit sold.

iv.  The unabsorbed or over absorbed overheads have not been adjusted into costing profit and loss account.

 

Prepare:

(a)    A Cost Sheet indicating the Costing Profit, and

(b)    A Statement Reconciling the Profit as disclosed by Cost Accounts and that shown in Financial Accounts.

 

 Solution: 2

Illustration: 3

The financial profit and loss account of a manufacturing company for the year ended 31^st March, 2017 is given below:

Trading and Profit and Loss Account

Particulars	Rs	Particulars	Rs
To Opening stock:		By Sales	4,60,000
Raw materials	25,000	By Closing stock:
Finished goods	40,000	Raw materials	30,000
Work-in-progress	12,500	Finished goods	15,000
To Purchases	1,65,000	Work-in-progress	20,700
To Wages (Factory)	30,000
To Electric Power (Factory)	65,000
To Gross Profit c/d	1,88,200
	5,25,700		5,25,700
To Admn expenses	20,500	By Gross Profit b/d	1,88,200
To Selling expenses	46,500	By Miscellaneous Revenue	26,800
To Debts declared bad	15,600
To Net Profit	1,32,400
	2,15,000		2,15,000

 

The cost accounts of the concern showed a net profit of Rs 1, 11,700. It is observed that the costing profit has been arrived at on the basis of the facts and figures as furnished below:

1. Opening stock of raw materials, finished goods and work-in-progress Rs 90,800.

2.   Closing stock of raw materials, finished goods and work-in-progress Rs 69,500.

3.   Miscellaneous revenue has not been considered in the cost accounts.

 

You are required to prepare a Memorandum Reconciliation Account and reconcile the difference in the profit and loss account.

 

 Solution: 3

 

Illustration: 4

The following figures have been extracted from financial accounts of a manufacturing firm for the first year of its operation.

Particulars	Rs
Direct materials consumed	50,00,000
Direct wages	30,00,000
Factory overheads	16,00,000
Administration overheads	7,00,000
Selling and distribution overheads	9,60,000
Bad debts	80,000
Preliminary expenses written off	40,000
Legal charges	10,000
Dividends received	1,00,000
Interest on deposit received	20,000
Sales (1,20,000 units)	1,20,00,000
Closing stock:
Finished goods (4,000 units)	3,20,000
Work-in-progress	2,40,000

 

The cost accounts for the same period reveal that the direct material consumption was Rs 56, 00,000. Factory OH is recovered at 20% on prime cost; Administration OH is recovered @ Rs 6 per unit of production; Selling and Distribution OH are recovered @ Rs 8 per unit sold.

 

You are required to prepare a Cost Sheet and a Financial Profit and Loss Account and reconcile the difference in the profit in the two sets of accounts.

Solution: 4