UNIT - I

PREPARATION OF RECONCILIATION STATEMENT

1. Mention the reasons for the dis-agreement between the figures of Cost
Accounting and Finanacial Accounting ?

In a business where cost accoounts and financial accounts are sepe-

rately maintained the profit or loss shown by costing profit and loss ac-
count may differ from that shown by profit and loss account. In such a
case it becomes necessary that costing profit and loss account is recon-
ciled with that shown by financial accounts. otherwise the two sets of
accounts may provide conflicting information.

However in integral accounting system cost accounts and financial

accounts are maintained in only one set of account books and anyone
profit and loss account is prepared. In such a system obviously there is
no need for reconciliation between cost and financial accounts.

I. Need for Reconciliation :

The need for reconciliation arises due to the following reasons :

i) To know the causes of Differences :

Reconciliation reveals the reason for difference in profit or loss be-
tween the cost accounts and financial accounts. Several items of In-
comes and expenses may have been recorded in financial accounts
and not in cost accounts and vice versa.

ii) To check Arithmetic Accuracy :

Reconciliation also helps in checking the arithmestic accuracy of cost
accountds and financial accounts.

iii) Items of difference in profit :

Difference between cost and financial accounting may arise due to
the following reasons :
a) Purely Financial Charges :
Examples : A) Loss on sale of Assets
B) Interest on Bank loan
C) Discount on Debentures
D) Expenses of Company’s transfer office
E) Damages payable to law
F) Fines and penalties
G) expenses on issue of shares and debentures
H) Loss on Investments

b) Purely Financial Incomes :

Examplses :A) Profits arising from the sale of fixed assets
B) Rent receivable
C) Dividends
D) Interest received on Investments
E) Transfer fee received
F) Interest received on Bamk deposits etc.,

c) Appropriation of Profits :
Examples : A) Dividends paid on the share capital of the company,
Transfer to general reserve and any other fund of
of accumulated profits.
B) Amounts written off on Good will, Preliminary expen-
ses, Discountd on Debentures etc.,
C) Charitable Donation
D) Income tax account

II. Items shown only in Cost Accounts

There are certai n items which are shown in cost accounts and not in
financial accounts. These items are :
a) Interest on capital employed but not actually paid
b) Charge in lieu of rent when premises are owned

III. Under or Over absorbtion of Overheads :

In cost accounting overheads are absorbed at an estimated or
pre-determined rates. In financial accounts the actual amount incurred
is taken into account. Therefore it may arise a difference between actual
expenses andpre-determined overheads absorbed. In otherwords over-
heads recovered at pre-determined rates in cost accoountding may be
more or less on the actual amouont of overheads shown in financial
books. The causes of difference between profit or loss as shown by the
two sets of account books.

IV. Different phases of Stock Valuation :

Valuation of closing stock affects the amount of profit or loss. In
costing books stock of materials, semi-finished and finished goods are
valued at cost using Fifo and Lifo methods etc., But in financial ac-
counts stocks are usually valued at cost or market price whichever is
less. This will lead to some differnce in profit or loss as shown by
costing and financial books.

The rates and methods of charging depreciation may be different in

two sets of account books. The financial accounts may be following
Straight line or Diminishing balance method etc., Whereas in cost
accounts Machine hour rate method, Production units method etc., may
be used. This will also cause difference in the profit figures of cost
accounts and financial accounts.

PROBLEMS

1) From the following particulars prepare a Reconciliation statement.

Rs.
Net profit as per financial books 63,780
Net profit as per cost books 66,760
Factory on cost under recovered in cost books 5,700
Adminstration expenses rdecovered in excess 4,250
Depreciation charged in financial books 3,660
Depreciation recovered in cost books 3,950
Interest received but not included in cost books 450
Income-tax provided in financial books 600
Bank interest credited in financial books 230
Stores adjustment (credited in financial books) 420
Depreciation of stock charged in financial accounts 860
Dividends appropriated in financial accounts 1,200
Losses provided fodr in finanacial books 260

2. The Net profit of Vivek & Co., Ltd., appeared at Rs. 60,652 as per
financial recods for the year ending 31-3-2017. The cost books however
showed a Net profit of Rs. 86,200 for the same period. A scrutiny of the
figures from the both sets of accounts revealed the following facts.
Rs.
Works overheads under recovered in cost 1,560
Adminstrative overheads overr rdecovered in cost 850
Depreciation charged in financial accounts 5,600
Depreciation recovered in cost 6,250
Interest on Investments not included in cost 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 in : Cost accounts 24,800
Financial accounts 26,300
Value of closing stock in : Cost accounts 25,000
Financial accounts 23,000
Interest charged in cost accounts 2,000
Good will written off 5,000
Loss on sale of Furniture 600

Prepare a statement showing the reconciliation between the figures

of Net profit as per cost accounts and the figures of Net profit as shown
in financial books.
3. From the following figures prepare the reconciliation statement.
Rs.
Net loss as per financial records 2,08,045
Net loss as per costing records 1,72,400
Works overheads under recovered in costing 3,120
Adminstrative overeheads recovered in excess 1,700
Depreciation charged in financial records 11,200
Depreciation recovered in costing 12,500
Ingterest received not included in costing 8,000
Obsolescence loss charged in financial books 5,700
Income tax provided in financial books 40,300
Bank interest credited in financial books 750
Stores adjustment credited in finacial books 475
Value of opening stock in : Cost accounts 52,600
Fincial accounts 54,000
Value of closing stock in : Cost accounts 52,000
Financial accounts 49,600
Interest charged in cost a/c but not in financial a/c 6,000
Preliminary exoenses written in financial accounts 800
Provision fofr doubtful debts in financial books 150

4. Prepare a statement of reconciliation from the following :

Rs.
Net loss as per cost accounts 34,500
Net loss as per financial accounts 40,950
Works ovsedrhesads under recovered in costing 6,240
Adminstrative overheads over recovered 3,400
Depreciation recovered in costing 11,200
Dedprdeciation charged in financial books 12,500
Interest on Investment not included in costing 6,000
Good will written off 5,000
Provision for doubtful debts in financial accounts 1,260
Stores adjustment credited in financial accounts 950
Loss of stock charged in financial accounts 3,000
5. From the following figures prepare a reconciliation statement :
Rs.
Net profit as per financial records 1,66,555
Net profit as per costing records 1,72,400
Works overheads under recovered in costing 3,120
Adminstration overheads recovered in excess 1,700
Depreciation charge4d in financial records 11,200
Depreciation recovered in cost 12,500
Interest received but not included in costing 8,000
Obsolescence charged in financial records 5,700
Income tax provided in financial records 750
Store adjustment (credited in financial books) 475
Depreciation of stock charged in financial accounts 6,750

[ April, 2019]

6. From the following figures prepare a Reconciliation starement :

Rs.
Profit as per cost accounts 17,000
Works overheads under recovered in cost accounts 4,000
Depreciation over charged in cost accounts 800
Bank interest received 1,000
Loss due to depreciation in stock value 400
Stock adjustment (credited in financial books) 400
Income tax paid 1,000
Interest on Investment received 8,000
Obsolescence loss charged in financial accounts 6,000
Over recovery of adminstration overheads in cost a/c 2,000

[ July, 2020 ]

7. The Net profit shown by financial accounts of a company amounted

to Rs. 28,550 while the profit shown by cost accounts is Rs. 38,660.
On Reconciliation the following differences were discovered :
 The following items were not charged in cost accounts :
Rs.
a) Director’s fee (Dr.) 650
b) Bank Interest (Cr.) 30
c) Income tax (Dr.) 8,300
d) A provision for Bad and doubtful debts made in
finanacial books, did not occur in cost accounts 570
e) Overheads in cost accounts obsorbed were Rs.8500
while the actuals were shown by financial books 8,320
f) The expenditure on a work started during the year on a new factory
was Rs. 16,000. Depreciation of 5% was provided in financial books.

8. The Net profit of Bharath company appeared as Rs. 1,28,755 as per

financial records for the year ending 31-12-2018. The cost books how-
ever showed a net profit of Rs. 1,72,400 for the same period. A scrutiny
fo the figures from both the sets of accoounts revealed the following
facts.
Rs.
Works overheads under recovered in cost 3,120
Adminstrative overheads recovered in excess 1,700
Depreciation recovered in cost 12,500
Depreciation charged in financial accoounts 11,200
Interest on investments are not included in cost 8,000
Loss due to obsolescence in financial accounts 5,700
Income tax provided infinancial accounts 40,300
Bank Interest and Transfer fee 750
Stores adjustment (Cr.) 475
Loss due to depreciation in stock values 6,750

You are required to prepare a Reconciliation statement to reconcile

both the figures of Net profits and also the Memorandum of Reconcilia-
tion account.

9. ‘I have got a problem’ Managing Director of X Ltd tells you. ‘My

Financial Accountant tells me you have made a profit of Rs, 12,000
this month. But my Cost Accountant insists that the figure should be
Rs. 16,000, which one is right ?’

Financial accounts Cost accounts

a)Raw materials: Opening 20,000 16,000
Closing 24,000 22,000

Finished goods: Opening 50,000 51,000

Closing 60,000 61,500

b) The following items do not appear in the cost accounts : Rs.

Donations to Charities 1,000
Profit on sale of car 2,000
Exchange rate loss 2,500
Baddebts written off 500
Discount allowed 500
Discount received 400
Rent receivable 600

You are required to preplare a statement Reconciling the profit

figures starting with financial profit.

10. The following is the ‘A’ company’s profit according to cost system
was Rs. 46,126. Whereas the financial account showed a profit of
Rs.33,248. From the following additional information you are required
to prepare a reconciliation statement showing the reasons for didfference
between the two figures.
Dr. Trading, P & L A/C of ‘A’ limited for the year ending 30-06-17 Cr.
---------------------------------------------------------------------------------------
--------- -----------------------------------------------------------------------------
To Opening stock 4,94,358 By Sales 6,93,000
To Purchases 1,64,308 By Closing stock 1,50,242
To Direct wages 46,266
To Factory overheds 41,652
To Gross profit c/d 96,658
----------- ------------
8,43,242 8,43,242
------------ -------------
To Adminstration
expenses 19,690 By Gross profit b/d 96,658
To Selling expenses 44,352 By Sundry Income 632
To Net profit 33,248
---------- -----------
97,290 97,290
---------- -----------
The costing records show Stock balance Rs. 1,56,394
Direct wages absorbed during the year Rs. 49,734
Factory overheds absorbed Rs. 39,428
Administratrion expenses charged at 3% on selling price.
Selling expenses charged at 5% on value of sales.
No mention of Sundry Income.

11. The following is the Trading and profit & loss account for the year
ending 31-03-2012 of ‘A’ Limited.
 Dr. Cr.
---------------------------------------------------------------------------------------
Particulars Amount Particulars Amount
---------------------------------------------------------------------------------------
To Purchases 21,000 By Sales 69,000
” Direct wages 10,000 ” Closing stock 1,000
” Manufacturing Expenses 12,000 ” Profit on sale of
Asset 2,500
” Selling expenses 6,000
” Distribution expenses 2,000
” Office expenses 5,000
” Depreciation 1,000
” Net profit 15,500
--------- ---------
72,500 72,500
---------- ----------

The following information is available in cost accoounts :

a) Closing stock Rs. 2,000

b) Depreciation Rs. 1,200

c) Factory overheads ( Manufacturing expensess ) 150% on Direct

wages.

d) Office expenses, Selling & Distribution expenses @ 10% on sales.

From the above information ascertain profit as per cost accounts and
Reconcile the profit of cost and financial accounts.
12. The followimg is the summary of the Trading and profit and loss
account of ‘X’ Ltd., for the year ending 31-12-2012.
Dr. Cr.
---------------------------------------------------------------------------------------
Partucilars Amount Particulars Amount
---------------------------------------------------------------------------------------
To Materials consumed 27,40,000 By Sales(1,20,000
units) 60,00,000
” Wages 15,10,000 ” Finished goods
( 4,000 units ) 1,60,000
” Factory overheads 8,30,000 ” Work-in-progress 1,20,000
” Adminstration expen- ” Dividends received 18,000
ses 3,82,400
” Selling & distribu-
tion expenses 4,50,000
” Preliminary expenses
written off 40,000
” Good will written off 20,000
” Net profit 3,25,600
----------- -----------
62,98,000 62,98,000
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The company manufactured a standard unit.
In cost accounts :
1) Factory expenses have been allocated to the production at 20% on
prime cost.
2) Adminstrative expenses have been allocated at Rs.3 per unit pro -
duced.
3) Selling and distribution expenses have been allocated at Rs.4 per
unit sold.

Prepare a statement of cost and profit and Reconcile the profit dis-
closed with that shown in the financial accounts.
13. From the following particulars prepare

1) Statement of cost
2) Profit and loss account (as per financial books)
3) Reconciliation statement of cost and financial accounts
Rs.
Stock of Materials at the beginning 30,000
Stock of finished goods at the beginning 60,000
Purchase of raw materials 1,80,000
Wages 75,000
Sale of finished goods 5,20,000
Stock of materials at the end 45,000
Stock of finished goods at the end 15,000

Calculate the factory on cost @ 20% on prime cost and office

on cost @ 75% on factory on cost. Actual works expenses amounted
to Rs.58,150 and office expenses amounted to Rs.45,750.

14. Prepare the undermentioned statements from the particulars given

below.
1. Statement of cost and profit as per cost accounts.
2. Profit and loss account as per financial accounts.
3. A Reconciliation statement.
Rs.
Stock at the beginning :
Raw materials 4,000
Finished goods 8,000
Purchase of Raw materials 24,000
Wages 10,000
Sales 65,000
Office expenses 6,100
Works expenses 7,750
Stock at the end :
Raw materials 6,000
Finished goods 2,000
 Selling price is fixed at cost plus 25%.
In cost accounts factory overheads are recovered at 25% of prime cost
and office overheads @75% of factory overheads.

15. From the following particulars prepare

1) A statement of cost and profit
2) Profit and loss account
3) A Reconciliation statement
Rs.
Purchase of Materials 43,200
Wages 18,000
Opening stock :
Raw materials 7,200
Finished goods 14,400
Stock at the end :
Raw materials 10,800
Finished goods 3,600

Calculate factory overheads @20% on prime cost and office

overheads @80% on factory overheads. Actual works expenses were
Rs.11,350 and actual office expenses were Rs.9,290. The Selling price
is fixed at 20% above cost.

16. In the firm the works expenses is absorbed at 60% of direct wages
and adminstration expenses absorbed at 20% of the works cost. The
total expenditure is as follows :
Rs.
Direct Material cost 2,00,000
Direct Wages 1,50,000
Works expenses 98,000
Adminstration expenses 85,000
------------
5,33,000
------------
 10% of the out put is in stock and sales amounted to Rs.5,10,000.
Prepare cost sheet, Trading and profit and loss accouont and Reconcilia-
tion Stetement.

17. Find out the profit as per cost accounts and financial accounts from
the following information and reconcile the results.
---------------------------------------------------------------------------------------
Product
Particulars -----------------------------
X Y
---------------------------------------------------------------------------------------
No.of units produced and sold 600 400
Total Material cost (Rs.) 3,600 2,800
Total Direct wages (Rs.) 3,000 2,400
Selling price per unit (Rs.) 25 30
---------------------------------------------------------------------------------------
The works on cost is charged at 80% of direct wages and the
office on cost at 25% of works cost. The actual works expenses amoun-
ted to Rs.4,500 and office expenses amounted to Rs.3,900. There was
no opening or closing stocks.

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