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:
Concept And Meaning Of Cost Reconciliation Statement And Need
For Reconciliation

Cost Reconciliation Statement

A manufacturing concern may adopt either Integrated Accounting System or Non-

Integral Accounting System. Under Integrated Accounting 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 results i.e. profits or losses. 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 agree with the profit or loss shown by the financial
accounts. In this situation, it is needed to reconcile the profits or losses shown differently by cost
accounts and financial account by preparing a statement called ' Cost Reconciliation Statement'
A statement which is prepared for reconciling the profit between financial account and cost
accountis known as cost reconciliation statement. A cost reconciliation statement is a statement
reconciling the profits or losses shown by cost accounts and financial accounts. It is a statement
wherein the causes responsible for the difference in net profit or loss between cost and financial
accounts are established and suitable adjustments are made to remove them. In other words,
cost reconciliation statement is prepared for the purpose of reconciling or agreeing the results of
financial accounts with the results of cost accounts by making suitable adjustments for the items
responsible for the disagreement. In short, it is the statement through which reconciliation or
agreement between the results (profits or losses) of cost accounts and financial accounts is
effected.

Need For Reconciliation

Reconciliation between the results of two sets of accounts is necessary due to the following
reasons:

1. Reconciliation helps to check the arithmetical accuracy of both sets of accounts.

2. Management is enable to know the reasons for the difference in results of both cost and
financial accounts.
3. Reconciliation explains reasons for difference which facilitate internal control.
4. Reconciliation ensures the reliability of cost data.
5. Reconciliation promotes co-ordination between cost and financial departments.
6. Reconciliation helps in formulation of policies regarding absorption of overheads and
depreciation and stock valuation method.
7. Reconciliation ensures managerial decision-making.

Causes Or Reasons For Difference In Profits Or Losses Between Cost

Account And Financial Account