Page 31 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes (ii) To ensure the mathematical accuracy and reliability of cost accounts in order to have cost
ascertainment, cost control and to have a check on the financial accounts,
(iii) Reconciliation helps in formulation of various policies regarding overheads, depreciation
and valuation of stock, and
(iv) It promotes coordination and cooperation between departments of cost accounts and
financial accounts.
When cost and financial accounts are maintained separately, the profit shown by one set of
books may not agree with that of the other set. In such a situation, it becomes necessary to
reconcile the results (profit/loss) shown by two sets of books.
There are certain items, which appear in financial books only and are not recorded in cost
accounting books e.g. loss on sale of fixed assets; expenses on stamp duty; interest on bank loan
etc. Similarly, there may be some items, which appear in cost accounts only and do not find a
place in the financial books e.g. notional rent; notional interest etc.
In cost accounts, overheads are generally absorbed on the basis of a predetermined overhead
rate, whereas in financial accounts actual expenditure on overheads is recorded, this will also
cause a difference between the figures of profit shown under financial and cost accounts.
Different methods of valuation of closing stock adopted in cost and financial accounts will also
cause a difference in the results shown by the two sets of books. In financial accounts the method
generally followed is cost or market price, whichever is less whereas in cost accounts different
methods of pricing of material issues such as LIFO, FIFO, average etc. are used.
Use of different methods of depreciation is also responsible for the variation of profit shown by
two sets of books. In financial accounts, depreciation may be charged according to written down
value method whereas in cost accounts it may be charged on the basis of the life of the machine.
Abnormal items not included in cost accounts also cause a difference in profit. If such items of
expenses are included, cost ascertained will not be correct.

Note It is important to note that the question of reconciliation of cost and financial
accounts arises only under non-integral system. However, under the integral accounts,
since cost accounts and financial accounts are integrated into one set of books and only one
profit and loss account is prepared, the problem of reconciliation does not arise.

Self Assessment

Fill in the blanks:

1. According to ………………, “No system is complete unless it is linked up with the financial
accounting, that results shown by both cost and financial accounting may be reconciled.
2. In the words of …………………, “Reconciliation is the determination of the items necessary
to bring the balances of two or more related accounts or statements, into agreement.”
3. Need for reconciliation arises due the reasons for the …………………… in the profit or
loss in cost and financial accounts.

4. Reconciliation helps in formulation of various policies regarding overheads, depreciation
and …………………… of stock.

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