Assignment On: Conflicts Among different Accounting Profits:

Resolving Procedure for Managerial Decision Making.

Course Title: Cost & Management Accounting

Course Code: AIS311

Submitted By: Submitted To

Name: Joni Biswas Name: Ashik-Uz-Zaman

Student ID: 17MGTO64 Designation: Assistant Professor
Department of Management studies, Department of Accounting &
BSMRSTU Information System, BSMRSTU

Date of submission: 5, August, 2021

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 ACKNOWLAGEMENT
I thank Almighty God first, as without His grace preparing this report would never be
possible. And I would like to sincerely thank my honourable teacher & course instructor
“Ashik-Uz-Zaman” for his significant role behind the accomplishment of the assignment.
I have been guided with lots of his valuable suggestions and experience throughout the
process of completion of the assignment.

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 Table of Content

 Introduction…………………………………………………………………04

1. Definition………………………………………………………………...04

 Reasons for differences……………………………………………………..04

 Importance of Reconciliation………………………………………………04

 Difference among Cost, Financial and Managerial accounting………….05

 Mathematical problem and solution……………………………………….06

1. Financial to Cost accounting reconciliation statement…………………...06

2. Cost to Financial accounting reconciliation statement…………………...07

 Standard cost variance……………………………………………………...08

 Purpose of Standard Cost Variance……………………………………….08

 Determination of standard cost variance………………………………….09

1. Direct Materials Variances………………………………………….........09

2. Direct labour Variances…………………………………………………..10

3. Variable Manufacturing Overhead Variances……………………............10

 Conclusion…………………………………………………………………...11

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Introduction:
There are two types of systems are followed for cost book keeping i.e., integral and non-
integral cost accounting system. Basically, Non-integral system emphasises that the
difference in objectives of financial accounting and cost accounting calls for a different
approach of recording the transactions.
Financial accounting is concerned with the ascertainment of profit/loss for the whole
operations of the organisation, for a relatively long duration usually a year, without being too
much concerned with cost computations.
Cost accounting aims at ascertaining the profit/loss made by different manufacturing or
product divisions for attaining the efficiency in the organisation by cost comparison and for
cost control.
But the profit cannot be equal for various reasons. As a result, we must prepare reconciliation
statement.

Definition of Reconciliation Statement:

A reconciliation statement is a document that begins with a company's own record of an
account balance, adds and subtracts reconciling items in a set of additional columns, and then
uses these adjustments to arrive at the record of the same account held by a third party

Reasons for differences:

The various reasons which create difference between cost and financial profit or loss shown
by the two set of books may be listed under the following heads:
(1) Items shown only in Financial Accounts
(2) Items shown only in Cost Accounts
(3) Absorption of Overheads
(4) Methods of Stock Valuation
(5) Abnormal Loss and Gains

Importance of Reconciliation:
Reconciliation of cost and financial account is necessary for the following reasons:
(1) To ensure arithmetical accuracy of both set of accounts for effective cost ascertainment
and cost control.
(2) To identify the reasons for different results in two sets of accounts.
(3) To evaluate the reasons for variations for effective internal control.

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(4) To enable the smooth co-operation and co-ordination between the activities of cost and
financial accounting departments.
(5) To ensure the standardization of policies relating to stock valuation, depreciation and
absorption of overheads

Differences among Cost, Financial and Managerial accounting:

BASIS FOR COST FINANCIAL MANAGERIAL

COMPARISON ACCOUNTING ACCOUNTING ACCOUNTING
Cost Accounting is an Financial Accounting is an The accounting in
accounting system, accounting system that which the both
through which an captures the records of financial and non-
organization keeps the financial information about financial information
Meaning track of various costs the business to show the are provided to
incurred in the correct financial position of managers is known as
business in production the company at a particular Management
activities. date. Accounting.

Reducing and Keeping complete record Providing information

controlling costs. of the financial transactions to managers to set
Purpose goals and forecast
strategies.

No, except for Yes, for all firms. No, it is not mandatory
Mandatory manufacturing firms it
is mandatory.

Information provided Users of information Managerial accounting

by the cost accounting provided by the financial is used only by
is used only by the accounting are internal and Potential Investors,
Users internal management external parties like Government,
of the organization creditors, shareholders, Regulatory Agencies,
like employees, customers etc. Employees,
directors, managers, Researchers etc
supervisors etc.
Short range planning It is prepared for a definite It is used for both
Time period time, usually 1 year. short and long-range
planning
Concerned with both Concerned with historical Deals with projection
past and present data of data for the future
Nature recorded. (Historical (futuristic in nature)
in nature)

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 Certain principles Governed by GAAP No set principles are
Principle followed for recording followed in it.
followed costs.
Only quantitative Qualitative aspects are not Uses both quantitative
Data used aspect is recorded recorded and Qualitative
concepts.
Detailed system of Only focus on recording Comprehensive
Control control control

NOT published Published in case of NOT published

Publication companies

Mathematical problem and solution:

Some problem of reconciliation statement and standard cost variance are given below and
solved properly to make clear:

1. Financial to Cost accounting reconciliation statement:

ABJ Ltd. Made a net profit of Rs. 3,80,000 during the year 2010 as per their financial
system. Whereas their cots accounts disclosed a profit of Rs. 5,86,200. On reconciliation,
the following differences were noticed:

1. Director’s fees charged in financial account, but not in cost account Rs. 13,000.
2. Bank interest credited in financial account, but not in cost account Rs. 600.
3. Income tax charged in financial account, but not in cost account Rs. 1,66,000.
4. Bad and doubtful debts written off Rs. 11,400 in financial accounts.
5. Overheads charged in costing books Rs. 1,70,000 but actual were Rs. 1,66,400.
6. Loss on sale of old machinery Rs. 20,000 charged in financial accounts.

Solution:
ABJ Ltd.
Reconciliation Statement
Particulars Amount Rs. Amount Rs.
Profit as per Financial Account 3,80,000
Add:
13,000
Director’s fees charged in financial account but not in cost account 1,66,000
Income tax charged in financial account but not in cost account 11,400
Bad and doubtful debts written 20.000
Loss on sale of old machinery 2,10,400

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 5,90,400
Less:
600
Bank interest credited in financial account but not in cost account 3,600 4,200
Overheads over absorbed in cost A/C (1,70,000-1,66,000)
5,86,200
Profit as per Cost accounts

2. Cost to Financial accounting reconciliation statement:

The financial books of KMC Ltd. Company show a net profit Rs. 2,50,000 for the year
ending 31 December, 2012. The cost accounts show a net profit of Rs. 1,86,000 for the
same corresponding period. The following facts are brought to light:

1. Work overheads over-absorbed Rs. 20,000

2. Administration overheads under-absorbed Rs. 45,000
3. Under valuation of opening in cost accounts Rs. 15,000
4. Bad debt written off during the year Rs. 14,000
5. Preliminary expenses written off during the year Rs. 10,000

Solution:
KMC Ltd.
Reconciliation Statement
Particulars Amount Rs. Amount Rs.
Profit as per Cost Account 2,50,000
Add:
Over absorbed works overheads in cost accounts 20,000

2,70,000

Less:
Under-absorbed Administration overhead in cost accounts 45,000
Under valuation of opening in cost accounts 15,000
Bad debt written off 14,000 84,000
Preliminary expenses written off 10,000
1,86,000
Profit as per Financial accounts

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What is a Standard Cost Variance?
A standard cost variance is the difference between a standard cost and an actual cost. This
variance is used to monitor the costs incurred by a business, with management taking action
when a material negative variance is incurred. The standard from which the variance is
calculated may be derived in several ways. For example:
 The standard cost of a component is based on the expected purchasing volume under a
specific contract with a supplier.
 The standard cost of labour is based on a time and motion study, adjusted for down
time.
 The standard cost to operate a machine is based on expected capacity levels, utility
costs, and scheduled maintenance charges.

Purpose of Standard Cost Variance:

As discussed earlier, this method of standard costing is essential to the management

because it allows the management to analyse the favourable financial condition well in
advance. To make the purpose clearer we will some more purpose of standard costing.

 Improved Cost Control – It allows the company to have a greater cost control by
allocating different standards to different cost and then emphasizing variance. In the
circumstance where everything does not go as planned then based on the variance
managers can be held responsible for the poor performance.

 Effective Managerial Planning – The standard cost system is helpful in managerial

planning as it helps the management in recognizing the cost to profit ratio and the
increase in actual cost tells the management that there is a need to reduce the cost and
plan accordingly.

 Efficient Inventory Management – This method of costing helps the management to

value the inventory more accurately, under the actual pricing method units of batches
of a particular product can differ from each other greatly.

 Cost Saving In Record Keeping – It might appear that this method of record keeping
might actually be more financially burdensome but the reverse is true.

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Determination of standard cost variance:

DDL Company produces a single product. Variable manufacturing overhead is applied to

products on the basis of direct labour-hours. The standard costs for one unit of product are as
follows:

Direct material: 5 ounces at $0.50 per ounce . . . . . . . . . . . . . . . . . . . . …. $ 2.50

Direct labour: 0.5 hours at $35.00 per hour . . . . . . . . . . . . . . . . . . . . . . …. 17.50
Variable manufacturing overhead: 0.5 hours at $12.00 per hour . . . . . . ….. 6.00

Total standard variable cost per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . .... $26.00

During June, 2,500 units were produced. The costs associated with June’s operations were as

Follows

Material purchased: 17,000 ounces at $0.60 per ounce . . . . . . ………... .$10,200

Material used in production: 14,000 ounces . . . . . . . . . . . . . . . . …………… —
Direct labour: 1,100 hours at $35.60 per hour . . . . . . . . . . . . . . . . ……....$39,160
Variable manufacturing overhead costs incurred . . . . . . . . . . . . . . ………$13,980

Required:
Compute the direct materials, direct labour, and variable manufacturing overhead variances.

Solution

1. Direct Materials Variances:

Materials price variance = (AQ *AP) - (AQ* SP)
=AQ(AP-SP)
=17,000 ounces ($0.60 per ounce-$0.50 per ounce)
=$1,700 U (Unfavourable), [AP>SP]

Materials quantity variance = (AQ * SP) - (SQ * SP) SQ= 5 ounces per unit * Unit of produced

=SP (AQ - SQ) = 5 * 2,500=12,500

=$0.50 per ounce (14,000 ounces - 12,500 ounces)

=$750 U (Unfavourable), [AQ>SQ]

Here,

AQ=Actual Quantity AP=Actual Price

SP= Standard Price SQ=Standard Quantity

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 2. Direct Labour Variances:

Labour rate variance= (AH * AR) - (AH * SR)

=AH (AR - SR)
=1,100 hours ($35.60 per hour - $35.00 per hour)
=$660 U (Unfavourable), [AR>SR]

Labour efficiency variance= (AH * SR) - (SH * SR) SH= Standard labour hour*units of produced

=SR (AH - SH) = 0.5 * 2,500=1,250

=$35.00 per hour (1,100 hours - 1,250 hours)

=$5,250F (Favourable), [AH<SH]

Here,

AH=Actual Hours AR=Actual Rate

SR= Standard Rate SH=Standard Hours

3. Variable Manufacturing Overhead Variances:

Variable overhead
rate variance = (AH * AR) - (AH * SR) AR=Variable Manuf. Overhead cost incurred/Actual hour

=AH (AR - SR) =13,980 / 1,100=12.71

=1,100 hours ($12.71 per hour - $12.00 per hour)

=$781 U (Unfavourable), [AR>SR]

Variable overhead
efficiency variance= (AH * SR) - (SH * SR)
=SR (AH - SH)
=$12.00 per hour (1,100 hours - 1,250 hours)
=$1,800 F (Favourable), [AH<SH]

Here,

AH=Actual Hours AR=Actual Rate

SR= Standard Rate SH=Standard Hours

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Conclusion:
Reconciliation is an important step when it comes to accounting. It is important for the
records to be updated on timely basis. It helps report and verify any discrepancies that are
posted in the books. Some basic types of essential reconciliations are bank accounts
reconciliation (bank ledger vis-a-vis bank statement), vendor reconciliation (vendor ledger
vis-a-vis vendor’s books), inter-company reconciliations, and credit card reconciliations etc.
The frequency of these statements can be monthly, weekly or annually depending on the
volume of transactions involved. Overall, we can say that it is important for every
organization to avoid conflict.

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 The End

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