Page 35 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes

Note If predetermined overheads are fixed fairly and actual expenditure incurred are
more, it is a case of inefficiency requiring remedial measure.

Task Define the concept of reconciliation statement. What is the need for reconciliation
statement?

2.4 Method or Procedure of Reconciliation

The cost and financial accounts are reconciled by preparing a Reconciliation Statement or a
Memorandum Reconciliation Account.
(A) Reconciliation Statement: Reconciliation statement is a popular and important method of
cost accounts and financial accounts. The method or procedure of preparing reconciliation
statement. The following method or procedure is recommended for preparing a
Reconciliation Statement:

(i) Ascertain the reasons/points of difference between cost accounts and financial
accounts.
(ii) Start with the profit as shown by the cost accounts.

(iii) (a) Regarding items of expenses and losses:
Add: Items over-charged in cost accounts.
Less: Items under-charged in cost accounts.

Example: Depreciation in cost accounts is ` 3,000 and that in financial accounts is ` 3,400.
This has the effect of increasing costing profit by ` 400 as compared to financial profit. Then in
order to reconcile, ` 400 will be deducted from costing profit.
(b) Regarding items of income:
Add: Items under-recorded in cost accounts.
Less: Items over-recorded in cost accounts.

Example: Interest on investments received amounting to ` 3,000 is not recorded in cost
accounts. This will have the effect of reducing profit by ` 3,000. Then in order to reconcile, this
amount of ` 3,000 for interest should be added in the costing profit.
(c) Regarding stock valuation:

 Opening stock
Add: Over-valuation in cost accounts.
Less: Under-valuation in cost accounts.
 Closing stock
Add: Under-valuation in cost accounts.
Less: Over-valuation in cost accounts.

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