Page 34 - DCOM206_COST_ACCOUNTING_II

Unit 2: Reconciliation of Cost and Financial Accounting

6. Abnormal Loss and Gain: Abnormal losses and abnormal gains are completely kept Notes
separate from cost accounts or they are transferred to costing profit and loss account. If
they are not included in cost accounts then the profit shown by these two sets of book will
vary and adjustment for which has to be done. If these losses are transferred to costing
profit and loss account then the profit will tally with the profit as shown by financial
accounts. These losses are like—theft, loss by fire, idle time loss etc.
7. Different Bases for Valuing Work-in-progress: Work-in-progress is valued either at the
stage of prime cost, works cost or cost of production. In cost accounts, the basis followed
may be quite different than that followed in financial accounts.

Did u know? Difference in the method of valuing work-in-progress gives rise to preparation
of reconciliation statement.

Self Assessment

State whether the following statements are true or false:
5. Work-in-progress is valued either at the stage of prime cost, works cost or cost of
production.
6. Valuation of stock in financial accounts is invariably based on the cost or market price,
whichever is greater.

7. If overheads are not fully absorbed, i.e. the amount in cost accounts is less than the actual
amount, the shortfall is called over-absorption.
8. If overhead expenses in cost accounts are more than the actual, it is called under-absorption.

9. Under Integral type of accounting 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.
10. Non-integral system of accounting is the system of accounting in which similar ledgers
are maintained in cost and financial accounts by accountants.
2.3 Advantages of Reconciliation

The advantages of reconciliation are as follows:
(i) The arithmetical accuracy can be checked in both the sets of books.
(ii) It helps in detecting frauds as for example; any wrong entry of stock of material in stores
ledger owing to theft can be brought to light by comparing with the stock of financial
accounts.

(iii) It enables to set right under or over absorption of overheads in cost accounts by making
use of supplementary rates.
(iv) Separate maintenance of cost accounts has the advantage of exemption from statutory
audit as the purpose of cost accounts is to ascertain and control cost rather than ascertainment
of profit, and
(v) Reconciliation facilitates location of areas of inefficiencies.

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