gecONCILIATION OF CosT AND FINANCIAL ACCOUNTS peoDUCT 1ON ses accounts i§ generally known as historical accounts and cost accounts ae but an extension of financial accounts. In small business concerns, ing a single product, it is not possible to have a separate set of books for aracounts. Cost information is extracted from financial records that are suitably jaigned. The periodical cost reports should not therefore present figures that inary way different from those under financial accounts. However, in large ness concerns, it is possible to have a separate set of books for both financial amounts and cost accounts. Where a separate set of books, ie. non-integral seouting, is maintained, the profits or losses disclosed by the two sets of scounts may differ. In such cases, it becomes necessary that cost and financial svomts are reconciled. Otherwise, the two sets of accounts may go out of step aud provide conflicting information which might pave way for unwise policy ‘ecisions being taken. Meaning of Reconciliation Tietern ‘reconcile’ is used to denote ‘settle differences’. Reconciliation is the Press of settling differences. Thus, the difference in profits between the two issettled as on a particular date, through the mechanism of reconciliation. Weed for and Objectives of Reconciliation Pf "econciliation is necessary to achieve the following two objectives: st and eM . a . : 'scertain the reasons for the difference in the profits or losses in co Nancial books, T ; check the arithmetic accuracy and reliability of cost and financial data.RCF-2 RECONCILIATION OF Cost AND FINANcy AL Accu, fs Reasons for Difference in Profits The various reasons or causes for the difference in the profits as sho and financial accounts may be outlined as under: WT BY cosy Items included only in financial records The items that in financial accounts but not in cost accounts reduce the financial profits ap are expense items) or increase the financial profits (if they are income item The following expense items are purely financial charges: ‘ 1. Loss on sale of fixed assets and loss on sale of investments Expenses on stamp duty, discount and other expenses relating to issue ang transfer of shares and debentures Interest on bank loans, mortgages, etc. Donations and charities N Fines and penalties Interest on capital and interest on debentures yawesw Amounts written-off as goodwill, preliminary expenses, etc. The following items are purely financial incomes: Profit on sale of fixed assets and investments 1b 2, Interest received on bank deposits and other invéstments 3, Fees received on issue and transfer of shares, etc. 4. Dividends received on investment in shares 5, Rental income, etc. There are certain items treated only in financial accounts as appropriation of in this category are: profits. Typical items i fund, general reserve, etc. a. Transfer to reserve Dividend paid on the share capital of the company priation to sinking fund Appro| Capital expenditure specifically charged to revenue These appropriations do not affect the financial profit. If, however fini profit after appropriation is taken, adjustment in respect of appropriation of will have to be carried out for reconciling financial profit with profit shown?) cost accounts. as SFpion OF Cost AND FINANCIAL Accounts RCE3 included only in cost records ‘There are cer : included in cost accounts but not in financi obit tend i ge! terest 0 capital that is not paid but due These items pia accounts to show the 1 otional cost of capital employed. pent ie. charging a notional rent of premises owned salary for the proprietor where he work: but does not ch arge salary. These charges reduce the profit in cost accounts alone without affe fecting the financial accounts. Under or over-absorption of overheads Overheads are actual costs in case of financial a basis of estimates in case of cost accounts. This leads to yadae a absorption of overheads. In case of under-absorption (overheads recovered the actual overheads incurred), costing profit will be -absorption, the costing profit recovered on the over in cost accounts less than higher than the financial profit and in case of ove f expense or income, or variation in the tems cause the difference in - to both will be lower than financial profit. stock is valued at cost only. The difference in the basis of valuation of stock is ds of charging depr accounts, different met! thod, diminishing balance machine hour rate or replaceme! may be adopted to ascertain the amoun stems 01 Abnormal gains and losses rparts. For example, abnormal wastage of d wages oF else abnormal gain will be shown by way of deduction kept outsi é t be burdened. This causes the difference in profits as per two bi non-treatment of an item o :ment is not caused tot! of an item common Different bases of stock valuation In financial accounts, stock is responsible for the disagreement in these two sets of books. thods such as straight line me' method, sinking fund method, etc. may be utation of amount of tion. The difference in the methods of depreciation followed in these two sys are merged with their m : f «will be added tothe normal debits for materials an expenditure. In cost accounts, however, abnormal wastages, losses or gains are t should no! Thus, either ifferent accounting sys! ofits. This disagree! valued at cost price or market price, wh ichever is less. However, in cost accounts, t of profits i Different metho eciation In financial followed for comp’ depreciation. In cost accounts, nt value method t of deprecial f accounts result in a difference in profits. In financial accounts, the abnormal items material by theft, cost of: ‘abnormal idle time, et from the normal . Nibiaits. fi sid ‘de the manufacturing costs as something with which oduct cos ooks of accounts. ounts charged in two di he extent . the systems.a RCF4 RECONCILIATION OF Cost AND FINANCIAL Accounts PROCEDURE OF RECONCILIATION The reconciliation may be done by way of preparing a reconciliation Statement op by preparing a memorandum reconciliation account, based on profit figures shown by cost accounts or financial accounts. Preparation of Reconciliation Statement As the name indicates, the reconciliation statement is prepared in the form ofa Statement by taking the profit as shown by cost accounts or financial accounts as the starting point. If the reconciliation statement is started with profit discloseq by cost accounts, the following items should be added to the profit as per Cost ‘accounts: 1. Over-recovery of overheads (factory overheads, administrative Overheads, selling and distribution overheads) in cost accounts or under-recovery of overheads in financial accounts. 2. Items of income credited in financial books only. 3. Overvaluation of opening stock (raw materials, work-in-progress and finished goods) in cost accounts. 4. Undervaluation of closing stock (raw materials, work-in-progress and finished goods) in cost accounts. The following items should be subtracted from profit as per cost accounts: a. Under-recovery of overheads (factory overheads, administration overheads, selling and distribution overheads) in cost accounts or over-recovery of overheads in financial accounts. b. Items of expenses and losses debited in financial accounts only. c. Undervaluation of opening stock (raw materials, work-in-progress and finished goods) in cost accounts. d. Overvaluation of closing stock (raw materials, work-in-progress and finished goods) in cost accounts. After making all the above additions and deductions in costing profit, the resultant figure will be the profit as per financial accounts, The above treatment of items will be reversed if profit as per financial accounts or loss as per cost accounts is aa as a starting point. The proforma of a reconciliation statement is follows :al oO Reconciliation statement Particulars P rofit as per cost accounts Over-absorption of overheads in dd: a cost accounts Items credited in financial accounts only Overvaluation of opening stock in cost accounts Undervaluation of closing stock in cost accounts Less: Underabsorption of overheads in cost accounts Items debited in financial accounts only Undervaluation of opening stock in cost accounts . Overvaluation of closing stock in cost accounts Profit as per financial accounts P "eparation of Memorandum Reconciliation Account The a Oa soliton of cost and financial profits may also be presented in the form base wee ee as ‘Memorandum Reconciliation Account’. In this account, edit side ne (financial or cost) is taken as opening balance and shown on the 10 be ag 7 J items of difference required to be deducted are debited and those "sultant pr are credited to this account. The balance in this account is the Side g¢ ofit (financial or cost). In case of loss, base loss is shown on the debit “coun, The count and resultant Loss is finally shown on the credit side of the Pecimen form of Memorandum Reconciliation Account is as follows:Particulars Rs. Particulars Rs, To Overheads under- xXx By Profit as per cost xx absorbed in cost accounts accounts To Undervaluation of opening xx | By Overheads over- stock in cost accounts absorbed in cost xXx accounts To Overvaluation of closing XX By Undervaluation of stock in cost accounts closing stock in cost accounts XX To Financial expenses: By Overvaluation of Discount xX opening stock in x cost accounts Fines and penalties XX By Financial incomes: Bank interest XX Rent XX Underwriter’s commission XX Interest XX Donations XX Dividend Xxx Goodwill written off XX Profit on sale of XX assets Preliminary expenses XX, By Items charged in written off cost accounts: Discount on issue of shares XX Interest on capital XX written off To Profit as per financial XXX Charge in bills of XX accounts rent Cc XXX XXX Points to be noted while preparing reconciliation statement 1. Keep the same principles of Bank Reconciliation Statement in mind. rect 2. Unless otherwise specifically given, direct materials, direct wages and dit expenses may be taken as ‘common’ for both sets of books. Similar ly, jks ° amount of sales is also assumed to-be the same in both sets of bo accounts.peconciLsa JON OF COST AND FINANCIAL ACCOUNTS RCF-7 If the profit as per cost accounts is not given in the problem, then the cost sheet is to be prepared first and reconciliation is to be made. while preparing the. profit & loss account, the actual expenses incurred are to be taken into account, whereas in cost accounts, the absorption rate given for the overheads should be used. Hence, the terms ‘absorbed’ or ‘recovered’ are used in cost accounts. The term ‘incurred’ is generally used in financial accounts. If information about number of units produced and sold is given in the problem, the value of closing stock of finished goods is to be ascertained on the basis of cost of production. The value of closing stock of finished-goods given in profit & loss account should not be used in cost sheet. If, on the other hand, no other details are available, the value of closing stock of finished goods given in profit & loss account can be used in the cost sheet. Similarly, opening stock of finished goods may be valued at the same rate as the closing stock, if no other information is given. Interest and dividend These two items can be treated either as income or expenses. If differences alone are given in the problem and debit or credit nature of these items is not mentioned, assumption can be made either way. However, when both profits are given, the treatment which leads to correct reconciliation can be adopted. Variability of overheads When overheads are budgeted on the basis of variability, the variable overhead is not affected as it is absorbed on the basis of output. But fixed overhead is proportionately undercharged or overcharged according to the-actual output compared to the budgeted output. When items of difference are not given Income given in the profit & loss account but not included in costing and also expenses and losses charged in profit & loss account but ignored in costing have to be taken into account specifically. Other differences in overheads, valuation of opening and closing stock, etc. in both sets of books are to be considered. Based on the items of difference, reconciliation statement can be prepared.PPE CE ME Be is RECONCILIATION or Cost AND FINANCIAL Account, RCF-8 ILLUSTRATIONS 7 Accounts ence in Results of Cost : and irerever Reconciliation Required 1. When the Causes for Di Financial Accounts Tilustration 1 in ing data : Prepare a reconciliation statement from the following Rs, Net profit as per financial books 63,780 Net profit as per cost books ; : 66,760 Factory overheads under-recovered in costing, 5,700 Administrative overheads recovered in excess 4250 Depreciation charged in financial books 3,660 Depreciation recovered in costing , 3,950 Interest received but not included in costing 450 Income tax provided in financial books 0 Bank interest credited in financial books 20 Stores adjustments (credited in financial books) 420 Depreciation of stock charged in financial books 860 Dividend appropriated in financial books 1,200 Loss due to pilferage provided only in financial books 260 [Madras, B.Com., 1986] , . | L Reconciliation statement . ! Solution Particulars Rs. Bs. Profit as per cost books 66,760 Add: (a). Administration overheads ‘ over-recovered in cost accounts 4250 —~ (b) Depreciation overcharged in / Cost accounts (3,950 — 3,660) . 290 (©) Interest received but not included in cost | J accounts 450 ‘ (d) Bank interest not included in cost accounts 230 (e) Stores adjustment (cr) not included in cost accounts 70 seu . 72,40 Less: (a) Factoty overheads under-recovered in cost accounts 5,700 (b) Income tax not provided in cost accounts “600 ea4 COST AND FIN) yraTtOn OF © ANCIAL Acc oe © Loss due to depreciation in charged in cost accounts ee tock value not d) Dividend appropriated but . 860 : in cost accounts ut Not provided e) Loss due to pilferage not ; 1200 : accounts Provided in cost j 260 Profit as per financial books (as per P & L A/c ) 8,620 i 7 . ‘ 63,780 Notes (i) | The term ‘recovery’ and ‘absorption’ are used interchangeably and they mean the same thing, (ii) Dividend appropriated means the i eee amount set a side for payment of Tlustration 2 (Reconciliation involving loss) Prepare @ reconciliation statement from the following data : Rs. Net loss as per cost accounts 1,72,400 Net loss as per financial accounts 2,16,045 Works overheads under-recovered in cost accounts 3,120 Depreciation overcharged in. cost accounts 1300 Administration overheads recovered in excess 1,700 Interest on investments 8,750 Goodwill written off in financial accounts 5,700 Income tax paid 40,300 Stores adjustment (credit in financial accounts) sno Depreciation of stock charged in financial accounts [Bangalore, B.Com., Oct/Nov. 2001 2 times] Solution Reconciliation statement Particulars Add ; Net loss as per cost accounts ‘ Works overheads under-recov Goodwill written off in financial books Income tax not provided in cost accounts counts Depreciation of stock charged in financial acco ered in cost accounts teas recovered in ' Administration overheads ove “cost accounts Depreciation overcharged in Interest on investment not inc Stores adjustment (credit in fin Net loss as per financial accounts ts cost accoun Juded in cost accounts ancial accounts)RCF10 RECONCILIATION OF Cost ‘AND FINANCIAL Accounts Il. When the Cost Profit and Causes while Profit as per Financial Accoun Illustration 3 From the following figures, prepare a re! for Difference are Given, ts is to be Ascertained conciliation statement. Cost books Financial books Rs. Rs, Profit 50,000 ? Marketing overheads a a Provision for bad debts na Bed Factory overheads ze i Directors’ fees : noe Income tax paid Pon J Rent of own premises , Ee Depreciation 11,250 12,000 Share transfer fees (cr) - 1,000 5,000 8,000 Administrative overheads [Dethi, B.Com., Apr. 1995] Solution Reconciliation statement Particulars Profit as per cost accounts Add: (a) Factory overheads over-absorbed in cost accounts (b) Rent on own premises charged only in cost accounts (c) Gains not shown in cost accounts : Share transfer fees Less: (a) Administration overheads under-recovered in cost accounts (b) Depreciation undercharged in cost accounts (c) _ Expenses not shown in cost accounts : Provision for bad debts Directors’ fees Income tax Profit as per financial accounts Note ‘Provision for bad debts and inco1 but not in cost accounts, Rs. Rs. 50,000 1,500 6,000 1,000 8,500 58,500 3,000 750 5,000 2,000 . 5000 | 257 32,150 . . ts me tax appear only in financial acco™” = | ;of COST. ‘AND FINANCIAL Accounts a iaTiON ; RCF-I1 pete she profit as per cost accounts is R 8 s, $6,250. The following points acorn arison betw Fo gout on comparison between cost accounts and financial accounts. ; ; Cost accounts Financial accounts ; Rs. Rs. @ Opening stock : ‘ ‘ Materials 10,300 10,500 Work-in-progress 8,000 8,500 ty Closing stock : Materials 15,000 14200 Work-in-progress 6,000 5,600 ©) Dividend and interest received Rs. 600. (@ Loss on sale of investments Rs. 1,000. ged in cost accounts but not considered in financial (e) Expenses char; accounts Rs. | ,500. é Goodwill Rs. 2,500 and preliminary expe written off during the year. (g) Overheads incurred Rs. 40,60 nses Rs. 3,000 have been 0 but overheads recovered amounts to Rs. 38,500. Find out the profit as per financial accounts by preparing a reconciliation statement. [Maadras, M.Com., Apr. 1985] Solution Reconciliation statement Particulars Rs. Rs. - oe 86.250 Profit as per cost accounts financial accounts, Add: (a) Income credited in in cost accounts : Dividend and interest received cost accounts (b) Expenses charged only in but not in financial accounts [2,100 88,350 ening stock of Undervaluation of op materials in cost accounts (10,500 — 10,300) Undervaluation of opening stock of work-in-progress in cost accounts - (8,500 8,000) Less: (@)ND FINANCIAL ACCOUNTS RCF.12) . RecoNcitsAtion OF Cost A (b) Expenses & losse: © Overvaluation of closing stock of 0 materials in cost accounts (15,000— pene Overvaluation of closing stock of work-in~ “0 progress in cost accounts (6,000 — 5,600) s not shown in cost . accounts but shown in financial accounts : Loss on sale of investments by Goodwill written off Ao Preliminary expenses z Underrecovery of overheads in cost accounts (40,600 — 38,500) . 2,100 10,500 77,850 Profit as per financial accounts Notes (i) Overheads recovere di) Gill) d are always in cost accounts, whereas ncial accounts. overheads incurred refers to final losing stocks increase profits Lower opening stocks and higher c and vice versa. Incomes like dividen' written off like goodwill are not shown in c “ course. id, interest received and intangible assets ost accounts in normal IL. When the Financial accounts Profit and Causes for Difference are Given, while the Profit as per Cost Accounts is to be Ascertained IHustration 5 The followi company. @ (b) © @) Office on cost ing information has been collected from the records of a manufacturing Cost accounts Financial accounts oe of opening stock : Rs. Ee i) Raw materials (i) Work-in-progress 27,342 27458 (ii) Finished goods rane 19,379 Value of closing stock : 1.000 2060 (@) Rawmaterials ; Gi). Work-in-progress 29,457 29,326 Gil) Finished goods 21,296 21,382 Factory on cost a 22,860 ‘ 18,000 15,000 6,000 - 7,000pee? solution 11 of COST AND FINANCIAL Accounts selling on cost : 9,600 sundry expenses. Transfer fees Interest on bank deposits Profit ' . 2 prepare a statement and ascertain profi jt as per cost accounts. _ RCF-13 7,500 21,000 200 1,500 4,11377 [Indore, B.Com., 1998 Adapted] Reconciliation statement Particulars : ao Rs. Rs. profit as per financial accounts [ 1,11,377 add: @ Opening stock of raw materials undervalued in cost accounts (27,458-27,342) 116}, (b) Closing stock of raw materials - overvalued in cost accounts (29,457 — 29,326) 131 (c) _ Closing stock of finished goods overvalued in cost accounts (24,000 — 22,860) 1,140 (d) Office on cost under-recovered in cost accounts (7,000 — 6,000) 1,000. (e) Sundry expenses not shown in.cost accounts 21,000 23,387 1,34,764 Less: (a) Opening stock of W.LP. overvalued in cost accounts (19,488 — 19,379) 109 (b) Opening stock of finished goods overvalued in cost accounts (21,000 — 20,642) 358 (c) Closing stock of W.I.P. undervalued in cost accounts (21,382 — 21,296) % (d) Factory on cost over-recovered in cost accounts (18,000 — 15,000) 3,000 (e) Selling on cost over-recovered in cost accounts (9,600 — 7,500) 2,100 (f) Transfer fees not included in cost accounts 200 (g) Interest on bank deposits not included : in cost accounts 1,500 7,353 Profit as per cost, accounts 127,411 Notes in cost accounts. “an - . Gi) ‘On cost’ is an alternative term for ‘overhead’. () Incomes like transfer fees and interest on bank deposits are excludedMlustration 6 A for the year ending 31 ist Dec. ‘however, revealed a different sed the following facts The net profit ofa company amounted to Rs. 60,41 1976 as per its financial records. The cost records, figure. A scrutiny of the two sets of accounts disclo ; a iod (a) Works overheads recovered in cost accounts during va len ai sen to Rs. 28,450 while the actual amount of these expe , only. riod w S. whereas the office Pt ir iod were Rs. 19,850, hi (b) Actual office expenses fo the pe! vy overheads recovered in cost accounts am mises owned by the company, amounting ounts but not in financial accounts. he period amounting to Rs. 16,490 (c) The annual rental value of prei to Rs. 10,000, was charged in cost ace (d) Selling and distribution expenses for tl were excluded from costing records. (e) Excess depreciation charged in cost accounts Rs. aoe (f) Expenses not included in cost-accounts and shown in financial accounts: Rs. Interest on bank loan 1,600 Bank charges 160 Directors’ fees 750 Penalty due to late completion of contract 2,500 (g) Gains during the year not included. in cost accounts : Rs. Transfer fees 45 Profit on sale of investments 4250 Interest on investments 9,450 (h) ~ The following appropriations had been made before arriving at the profit figure of Rs. 60,412 shown above : Rs. Transfer to dividend equalisation fund 10,500 Transfer to income tax reserve 6,400 Transfer to debenture redemption fund 9,000 (i) q sum of Rs. 10,000 given as donation to the Prime Minister’s relief und had been charged to profit and loss account as business expense. Prepare a reconciliation stat ; : lement and the costing records, find the amount of profit/loss as pet [Madras, M.Com., Apr. 19941rion oF COST AND Financia Accounts Ta ee RCF-1S tion Particulars R Ss. Rs. Net profit as per financial accounts 60412 dt office overheads under-absorbed 5350 Expenses not charged in cost accounts : Selling and distribution expenses . 16,490 Interest on bank loan 1,600 Bank charges 100 Directors’ fees 750 Penalty due to late completion of contract 2,500 Donation to Prime Minister’s relief fund 10,000 Appropriations of profit not charged in cost accounts : Transfer to dividend equalisation fund 10,500 Transfer to income tax reserve 6,400 Transfer to debenture redemption fund 9,000 | _ 62,750 123,162 Less: Works overheads under-absorbed 7,060 Rent on own premises charged only in cost accounts 10,800 ~ Excess depreciation charged in cost accounts 2,400 Incomes not considered in cost accounts : Transfer fees 45 Profit on sale of investments 4250 Interest on investments 9,450 | __ 34,005 Profit as per cost accounts 89,157 1V, When Information Relating to Trading, Profit & Loss A/c and tement is to be Prepared Cost Sheet are Given — Reconciliation Sta! Mustration 7 Mis. Ashok: + of Rs. 20,000 during the year 1995 as per their an La, mado prt 1g disclose a profit of Rs. 15,000. From Costing system, i , whereas their final accounl i" following profit and loss account for the year ended 3 Ist Dec. 1995 as Per the nancial books, you are required to pr epare a reconciliation statement showing, Causes for this difference.— RECONCILIATION OF COST AND FINANCIAL ACcounys Profit and loss A/c T T : ___ Particulars Rs. Particulars Rs, To Opening stock | 1,00,000 | By Sales 1,75,000 To Purchases 0,000 | By Closing stock 80,000 To Direct wages 20,000 To Factory expenses 15,000 To Gross profit c/d 40,000 } 2,55,000 2,55,000 To Administrative expenses 10,000 | By Gross profit b/d 40,000 To Selling expenses 15,000 To Net profit 15,000 40,000 40,000 Costing records show the following : (a) Stock ledger closing balance Rs. 89,000. (b) Direct labour Rs. 23,000. (c) Factory overheads Rs. 13,000. (d) Administrative overheads and selling expenses calculated at 8% each of the selling price. (Madras, B.Com., Mar. 1994; Nov.2004] Solution Reconciliation statement Particulars Rs. Rs. Profit as per cost accounts 20,000 Add: Direct wages over-absorbed in cost accounts 3,000 (23,000—20,000) ; Administrative overheads over-absorbed in cost accounts : Cost accounts : 1,75,000 x 8% = 14,000 P&LAL., = _ 10,000 4,000 | 7,000 Less; Factory overheads under-absorbed in cost 27,000 accounts (15,000 ~ 13,000) 2,000 Selling overheads under-absorbed in cost accounts: P&LA/c, = 15,000 Cost accounts : 1,75,000x8% = 14,000 1,000 Closing stock overvalued in cost accounts (89,000- 80,000) Profit as per financial accounts (as per P&L A/c.) 2 15,000pea hrt A a. COUNTS — — ea RCF-17 fi conclel en Information Relating to Tradin v. gre civert-Cost Sheet and Reconcitiag 8, Profit & Loss A/c and Cost Sheet lon Statement are to be Prepared ork-in- mn stration 8 (Work-in-progress details Works overheads on prime cost basis) ; ; ec ) ive below is be trading and profit and loss account of nied 1-3-1993 : of a company for the year — ticulars Partie Rs | Particulars Rs. | To Materials rte By Sales (60,000 units) | 60,00,000 To WaBeS oases 5,10,000 | By Stock of finished to Factory &XP 830,000 | goods (2,000 units) | 1,60,000 Administration expenses 3,82,400 | By Work-in-progress : Jo Selling expenses 4,50,000 Materials 64,000 Jo Preliminary expenses Wa / written off 60,000 Factory “um To Net profit 325,600 expenses 20,000} 1,20,000 By Discount received 18,000 62,98,000 : 62,98,000 The company manufactures standard units. In the cost accounts : (a) Factory expenses have been allocated to production at 20% of prime cost (b) Administration expenses at Rs. 6 per unit produced and (c) Selling expenses at Rs. 8 per unit sold. a stateme the profit as per cos You are required to prepare nt of cost and profit and a statement t accounts and net profit showing reconciliation between shown in the financial accounts. [CA., Inter, May 1993; Madras, M.Com., May 1994 Adapted] Solution Statement of cost and profit for the year ended 31-3-1993 Particulars Rs. Rs. i 27,40,000 Wane 15,10,000 50, Add Prime cost 42,50,000 : Factory expenses : 20% of prime cost et . (42,50,000 20%) 57900000 Less « ; “5: Closing stock of work-in-progress * Font Materials 36,000 WagesRECONCILIATION ‘or Cost AND FINANCIAL Accom, ete 20,000 Factory expenses (1,00,000 x 20%) tn Works cost a 80,009 ho lasvat ' er u Add: Administration bari : ort 0x6) |_3720% ' 53,52,009 Cost of production Less : Closing stock of 53,52,000 5 900 finished goods | ~ 62,000 nee re st of production of goods s 19,355 Add ° Selling expenses. Rs. 8 per unit sold (60,000 x 8) |_ 480,00), Cost of sales 5659355 Profit (Bal. Fig.) 3,40 645 a — Sales | 60,00,009 Reconciliation statement Particulars Rs. | Rs, Profit as per cost accounts 340,645 Add: Factory expenses over-recovered (8,50,000—8,30,000) 20,000 Selling expenses over-recovered (4,80,000—4,50,000) 30,000 Dividend received omitted to be taken in cost accounts 18,000 68,000 4086S Less: Administrative expenses under-recovered (3,82,400—3,72,000) 10,400 | Over valuation of closing stock in cost accounts (172,645 — 1,60,000) 12,645 | Preliminary expenses written off only in financial accounts 60,000 B05 Profit as per financial accounts 325,000 Iustration 9 (Work-in-progress details—Works overheads on units bas) The following i Fj; . , y oe m lowing is the profit and loss account of a manufacturing company fort* | Particulars Rs. | Particulars Te x emai 48,000 | By Sales ut ‘0 Wages i To Works expenses aan » oon ee ut A inished gooJLIATION OF COST AND FINANCIAL A, peconc! VAL Accounts RCP.| so Gress profit fd —— qo Administration expenses 6,000 ToNet profit By Gross profit b/d During the year, 6,000 units were manuf units were sold. ! ‘actured and 4,800 units were The costing records show that works expenses have been worked out at Rs. 3 per article and administrative expenses at Rs, 1.50 per article. ue Prepare a statement showing profit as iliation h Per cost records and a reconcili statement of cost and financial profits, " [Madras, M.Com., May 1998; B.Com., Oct. 2001] Solution . Statement showing cost and profit for the year ended 1986 Particulars Rs. Rs. Materials : 48,000 Less: Closing work-in-progress materials 3,000 45,000 Wages : 36,000 Less: Closing work-in-progress wages 1,800 34200 Prime cost 79,200 Add: Works expenses (6,000 x3) 18,000 Works cost 97,200 Add: Administration expenses (6,000 x 1.50) |__ 9,000 _ Cost of production 1,06,200 Less :’ Closing stock of finished goods 40 (1,06,200 , 1,200) oe 6,000 ; 84,960 Cost of production of goods sold 11,040 Profit (Bal. Fig.) T6000. Sales ‘ ed, work-in-progress Note si recovered on units produced, . Since works overheads are ks overhead. Cost accounts does not include any WorAND FINANCIAL Accounts RCF.20 RECONCILIATION OF ce ment Reconciliation state! Particulars Profit as per cost accounts Add: Excess recovery of administration xP in cost accounts (9,000 — 6,000) enses Less : Overvaluation of closing stock of fini) goods in cost accounts (21,240 - 18,01 Underrecovery of works expenses in cost accounts [18,000 — (24,000 — 1,200)] Profit as per financial accounts Mlustration 10 (Work-in-progress details — Works overheads on wages basis) The following is the profit and loss a/c of ‘X’ Co. for 1999 : Particulars Rs. Particulars Rs. To Materials 90,000 | By Sales 2,10,000 To Wages 80,000 | By Closing stock : To Factory expenses 45,000 Finished goods 35,000 To Office expenses 10,000 | Work-in-progress : ToNet profit ~ 30,000 Materials 5,000 . Wages 4,000 Factory expenses 1,000 10,000 2,55,000 25500 During the year, 10,000 units were produced and 8,000 units were sold. Factory expenses in costin ig were absi Y ee ‘orbed at 80% of wages, office Prepare a statement sh es Owing profit as per’cost records and reconcile it Solution Working Notes Closing wotk-in-progress : Material som : Wages Factory &xpenses : ‘200 ; A Closing work-in. ae ne a "Progress as per cost accounts “12200,LIATION OF Cost AND FINANCIAL Accounts econ ee ee ment showi State NB cost and profit of X Co, for the year 1999 - Particulars we Rs. Materials 4 oo Wages ant Prime cost : 1,70,000 jad; Factory expenses (80,000 x 80%) 64,000 ; 234,000 Less: Closing work-in-progress 12.200 Works cost | 221,800 Add: Office expenses (10,000 x 3) 30,000 Cost of production ' 2,51,800 Less: Closing stock of finished goods (251,800 x2.000) 50,360 10,000 a Cost of production of goods sold 2,01,440 Profit (Bal. Fig.) 8,560 Sales 2,10,000 Reconciliation statement Particulars Rs. | Rs. Profit as per cost accounts 8,560 Add: Overabsorption of factory expenses (64,000-45,000) 19,000 Overabsorption of office expenses 9 000 (30,000 10,000) |__ 20,000 a Less: Overvaluation of closing work-in-progress 2200 in costing (12,200 — 10,000) on Overvaluation of closing stock of finishe on We | te g00ds in costing (50,360 — 35,000) 30000 Profit as per financial accounts moo” gee hasis)St ae VI. When Cost Sheet, Profit & Los: ; Ak Reconciliation Statement are to be Prepared yuustration as m the following particulars for the year 2001, prepare (a) a statement showing rofit aS Per cost accounts; (b) P & L Alc as per financial accounts and pr statement of reconciliation reconciling profit as per cost accounts and financial gocounts: Rs. Purchase of raw materials 86,400 Wages , 36,000 Opening stock : Raw materials 14,400 Finished goods 28,800 Stock at the end : Raw materials 21,600 Finished goods 7,200 Calculate factory overheads at 20% on prime cost and office overheads at 80% on factory overheads. Actual works expenses amounted to Rs. 22,700 and actual office expenses amounted to Rs. 18,580. The selling price was fixed at 20% above cost price. In-cost statement, show what percentage does each individual item of cost bear to the total cost. Solution Statement of cost and profit Particulars Rs. Rs. Raw materials consumed : Opening stock of raw materials 14,400 Add : Purchase of raw materials . 86,400 Le 1,00,800 Ss - Closing stock of raw materials 21,600 79,200 Wages 36,000 Add - Prime cost 1,15,200 * Factory overheads (1,15,200 x 20%) 23,040 Works cost 1,38,240. SeIANCIAL ACCOUNTS —_ acento of 00 NO Add: Office overheads (23,040 x 80%) bear Cost of production as Add: Opening stock of finished goods am Less: Closing stock of finished goods i on Cost of sales ” 356 profit (1,78,272% 20%) nee Sales 13,926 Percentage on total cost : _79,200_ , 199 = 50.55% Materials 1,56,672 _36,000_ ,. 199 = 22.98% Wages * 7,56,672 23,040 _ » Factory overheads : 756.672 6,672 x 100= 14.71% 18,432 : st?*_ x 100= 11.76% Office overheads * 156,672 Profit & Loss A/c Particulars Rs. Particulars Rs. To Opening stock : By Sales 213,926 Raw materials 14,400 | By Closing stock : Finished goods 28,800 Raw materials 21,600 To Purchase of raw materials 86,400 Finished goods 7200 To Wages 36,000 To Works expenses 22,700 To Office expenses 18,580 To Net profit 35,846 2,42,726 7,42, 726 Reconciliation statement Particulars Rs. Profit as per cost accounts 35,654 Add: Factory overheads over-recovered in cost accounts (23,040 - 2. 340 ( 2,700) a 35,0 Less: Office overheads under-recovered in cost accounts (18,580 ~ 18,432) ». | d 75,046 Profit as per financial accounts (as per P&LA/c.)ausiration 14 (V Ore than one product produced) fl : a Electronic Corporation manufactures Nityam’. From the following inform ‘Wo types of television Sets ‘Satyam’ 7 are a statement showing total cost, pr lation obtained from the corporation, ofit Q id There is No opening or closing bisa sales of T.V, sets and per T.V. se Satyam Nityam Rs. Rs. Materials 1,80,000 640,000 Labour 80,000 3,60,000 Selling price per T.V. set 4,400 4,500 and office overheads at sion sets were produced Works overheads are charged at 80% on labour 30% on works cost. 120 Satyam and 450 Nityam televi and sold. Find out the profit as per financial accounts, assuming that the actual works expenses amounted to Rs. 4,10,000 and office expenses to Rs. 2,95,000. Reconcile the profits shown by cost and financial records. [Andhra, B.Com., Apr. 1995] Solution Statement showing cost and profit Particulars Materials Wages Prime cost Add: Works overheads (80% on labour) — + Works costRCF-28 dd; Office overheads : (20%on works cost) Cost of production Profit (Bal. Fig.) Particulars To Materials : m Satyam 180.000) og 120x4,400=5,28,000 Nitya 640000] 82% Nityam ee 450 x4,500=20,25,000) 25,53,000 Satyam 80,000 — Nityam —_3,60,000 4,40,000 To Works expenses 4,10,000 } To Office expenses 2,95,000 To Net profit c/d 5,88,000 25,53,000 25,53,000 { Reconciliation statement Particulars 4 Rs. Rs. { Profit as per cost accounts 6,18,600 i Add : Over-absorption of office overheads in costing (3,22,400-2,95,000) 27,400 27,400 ~ 6,46,000 Less : Under-absorption of works overheads in costing (4,10,000—-3,52,000) 58,000 58,000 Profit as per financial accounts 5,88,000 ae £2 VII. Preparation of Reconciliation A/c Mlustration 15 Prepare a Memorandum Reconciliation Account from the following particulars : Profit shown by cost books Rs. 30,114 and by financial books Rs. 19,760. On | reconciling, the following information is available : (a) Overheads absorbed in cost books Rs. 7,500 and incurred Rs. 6,932. (b) Directors’ fees not included in cost books Rs. 750. (c) Provision for bad debts Rs. 600. ‘ | (e) Anew work was under taken for Rs ¥ . 12,000 ation of 5% Was ii provided for only in the financial books eee | (f) Transfer fees Rs, 28. ‘ | : (g) Income tax Rs. 9,000. | ; [Bangatore, B.Com, Apt. 1% ” =rectors’ fees provision for bad debts pepreciation on new works Income tax to profit as per financial books ‘ost AND FINANCIAL ACCOUNTS Memorandum Reconciliation A/e By Profit as per cost books By Overheads over- By Transfer fees shown only in financial books RCF-29 fiustration 16 From the following P & L A/c, draw up a memorandum reconciliation account : Profit & Loss A/c for the year ending 31-12-2001 Particulars Rs. Particulars Rs. To Office salaries 11,000 | By Gross profit b/d 54,600 To Office expenses 6,500 | By Dividend received 500 To Salesman’s salaries 4,900 | By Interest on bank To Sales expenses 9,300 deposit 170 To Distribution expenses 2,950 To Loss on sale of machinery 1,920 To Fines 250 To Discount on debentures 200 To Income tax 7,100 To Net profit c/d 11,150 55,270 55,270 joel | To Reserve 1,200 | By Net profit b/d 11,150 To Dividend 4,400 To Balance c/d | _5.550_ 11,150 | L150 ascertained a profit Rs. 19,950 as The cost accountant of the Per his books. company hasRCF-30 RECONCILIATION OF COST AND FINANCIAL Accounts Solution Memorandum Reconciliation A/c Particulars Rs. Particulars Rs, To Items of expenses and By Profit as per losses not shown in cost accounts 19.959 cost accounts : By Incomes not shown Loss on sale of machinery 1,920 | in cost accounts : Fines 250 Dividend received 500 Discount on debentures 200 Interest on — Income tax 7,100 bank deposit 170 Reserve 1,200 Dividend . 4,400 To Profit as per P& L A/c 5,550 ee : 20,620 20,620 VIII. Overhead Control Accounts Illustration 17 Following are the figures extracted from the co: Stores : (a). Opening balance (b) Purchases (c)_ Transfer from work-in-progress (d) Issued to work-in-progress (e) Issued to repairs & maintenance (f) Sold some goods as a special case at cost (g) Shortage in the year * — Work-in-progress (a) Opening balance (b) Direct labour cost charged (c) Overhead cost charged (d)_ Closing balance Finished product : Others : Wages of the period Overheads expenses them. Rs. 35,000 Rs. 1,25,000 You are required to find profit or loss as per financial accounts [A-P. Open., B.Com., st ledger of a manufacturing unit. : Rs. 15,000 80,000 40,000 80,000 10,000 5,000 3,000 30,000 30,000 1,20,000 20,000 Entire output is sold at a profit of 10% on actual cost from work-in-progress and reconcile Dee. 19861RCF-31 Particulars : | Rs. By W.1.P. A/c By Overheads control A/ By G.L.A. A/c (sale) By Overheads control A/c — shortage By Balance c/d Work-in-progress A/c Particulars Particulars Balance b/d By Stores ledger control A/c » Stores ledger contr ‘ol A/c By Finished stock A/c » Wages: control A/c (Bal. Fig.) , Overheads control A/c By Balance c/d orking Note Finished stock at cost 2,00,000 Add: Profit at 10% on actual cost 20,000 _ Sales _2,20,000_ Overheads control A/c Particulars Rs. Particulars L Rs. Stores ledger control Ale 10,000 | By WLP. A/c Stores ledger control A/c 3,000 | By Balance c/d ) Wages control A/c (35,000 —30,000) 5,000 G.L.A. A/c 1,25,000 1,43,000 Wages control A/c Rs. Particulars GLA. A/c By W.LP. Alc By Overheads Ale (Bal. Fig.) ParticularsRCF-32 . RECONCILIATION OF CosT AND Financia Accounts .. Profit as per cost A/c : Rs. 20,000 Note GLA A/crefers to General Ledger Adjustment Account. Profit & Loss A/c Particulars | Rs. Particulars Rs. To Opening balance : By Sales 2,20,000 Stores By Stores sold 5,000 W.LP. By Closing balance : . To Purchases Stores 37,000 To Wages WLP. 20,000 To Overhead expenses By Net loss (Bal. Fig.) 3,000 2,85,000 Reconciliation Statement Particulars Profit as per cost accounts Less: Under-absorption of overheads Loss as per financial accounts