What is Cost reconciliation statement accounts? Preparation of cost reconciliation statement

What is Cost reconciliation statement?

What is Cost reconciliation statement accounts? Preparation of cost reconciliation statement

Introduction

A manufacturing concern may adopt either inter graded accounting system or non-integral accounting system. Under integrated account ting system, only one set of books is maintained to record both costing and financial transaction, therefore, under this system, both financial accounts

and cost accounts give similar results. But in non-integral accounting system, separate books are maintained for costing and financial transactions, which may exhibit different result i.e. profit or loses. In other words, when cost accounts and financial accounts are maintained independently by a concern, the profit or loss shown by the cost accounts may not reconcile the profit or losses shown different by cost account and financial accounts by preparing a statement called 'cost reconciliation statement'.

Meaning of cost reconciliation statement

A statement which is prepared for reconciling the profit between financial and cost account is known's as cost reconciliation statement statement. A cost reconciliation statement is a statement recording the profit or losses shown by the cost accounts and financial account. It is a statement where the causes for the difference in net profit or net loss between cost and financial accounts are established and suitable adjustments are made to remove them. In other words, cost reconciliation statement is a statement prepared for the purpose of reconciling or agreeing the result (i.e.  Net profit or net loss) of financial accounts with the results of cost accounts by making suitable adjustment for the items responsible for the disagreement. In short, it is the statement through which reconciliation or agreement between the results (profit or losses) of cost account and financial account is affected.

Need for reconciliation 

Reconciliation between the result of the two sets of accounts in necessary due to the following reasons:

a. It helps to check the arithmetical accuracy of both the sets of accounts.

b. Management is enabling to know the reasons for the difference in results of both cost and financial account.

c. It explains reasons for different which facilitate internal control

d. It ensures the reliability of cost data.

e. It promotes co-ordination between cost and financial department.

f. It helps in formulation of policies regarding absorption of overheads and depreciation and stock valuation methods

g. It ensures managerial decision-making

Causes or reason for difference in profits or losses

The disagreement between cost and financial results arise due to the following reasons:

a. Items shown only in financial account

b. Items shown only in cost account

c. Over or under absorption of overhead

d. Different in valuation of stock.

e. Difference method of charging depreciation.

f. Abnormal gain or losses.

Items shown only in financial account

There are certain items of income and expenditures which are shown only in financial accounts not in cost accounts. As a result, the profit or loss as per cost accounts would be quite different from the profit or loss as per the financial accounts these items of financial nature can be divided in three groups:

Items shown only in cost account

There are very few items, which are shown only in cost accounts but not in the financial accounts as they do not represent any transaction with outsides. These items are also responsible for the disagreement of the result shown by the two sets of accounts. These items are:

Over or under absorption of overhead

In cost accounts, overhead are charges on the basis of pre-determined percentage. But, in financial account they are charged with the actual amount. This results over or under absorption of overheads in cost accounts and may be the main reason for different in profits disclosed by cost accounts and financial accounts.

Difference in valuation of stocks

In financial accounts, stocks are valued at cost or market price, whichever is lower, but in cost accounts, stocks are valued only at its cost price. This result in some different in result i.e. profit or loss. The effect of stock valuation on profit is shown on the following table:

Difference methods of charging depreciation

There are different methods of charging depreciation. In financial account, depreciation may be calculated on straight line or diminishing balance method as per income tax act. But in cost accounts, depreciation is calculated on the basis of used of the assets (generally machine hours).

Abnormal gains and losses

Abnormal gains and losses are shown in financial accounts while they are completely excluded from cost accounts. Goods lost but fire, theft, accident or cost of abnormal idle time are example of abnormal losses which are shown in financial accounts but not in cost accounts. Such abnormal gains and losses also lead to disagreement of cost and financial accounts results.

Preparation of cost reconciliation statement

If there is a difference in the results shown by the cost accounts and financial accounts, then only a cost reconciliation statement is prepared to reconcile their results by removing their differences.

A cost reconciliation statement is prepared on the same footing on which a bank reconciliation statement is prepared. The preparation of cost reconciliation statement involves the following steps:

Step 1: start with profit or loss shown by any one set of accounts such as:

• Net profit as per cost account

• Net profit as per financial account

• Net loss as per cost account

• Net loss as per financial account

Step 2: find out the cause of difference that result the disagreement between the profit shown by cost account and financial account. The causes of difference and their effect on privet are as follows: