BBA Cost Accounting Reconciliation of Cost And Financial Accounts

BBA Cost Accounting Reconciliation of Cost And Financial Accounts : BBA Cost Accounting 1st Semester Most Important Notes Study Material Questions Answers Papers in English.

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BBA Cost Accounting Reconciliation of Cost And Financial Accounts
BBA Cost Accounting Reconciliation of Cost And Financial Accounts

Bba Cost Accounting Reconciliation of Cost And Financial Accounts

Bba Cost Accounting Reconciliation of Cost And Financial Accounts Topic Wise Short Notes: 

Learning objectives

After Studying this chapter, you are able to understand:

  • Reasons for Necessity of Reconciliation
  • Reasons for Disagreement of Cost Profits and Financial Profits
  • Reconciliation of Cost Accounts and Financial Accounts

 

Bba Cost Accounting Introduction to  Reconciliation of Cost And Financial Accounts Introduction 

Introduction 

The financial accounts are maintained for ascertainment of profit or loss of the concern as a whole for the accounting period under review and also financial position of the concern at the close of the financial year. The financial accounts deal with the classification, recording and summarisation of transactions of the concern and ends up with preparation of final statements viz.  Profit and loss account and balance sheet for the accounting period. The cost accounting will deal with the ascertainment of cost of product, absorption of overheads into product cost, ascertainment of division wise or product wise profitability etc. different sets of accounts are maintained under financial accounting and cost accounting. The accounting principles, methods and practices are different under these two accounting systems. The maintenance of different sets of accounts with different objects will cause to show different figures of profit or loss in cost accounts and financial accounts and it will necessitate reconciling the two accounts periodically and a statement of reconciliation is prepared to show the reasons for difference in profit or loss shown by cost and financial accounts. The cost and financial accounts are maintained in different forms or follow different methods, principles and approaches and it will naturally result in difference in profit or loss ascertained in the cost and financial accounts which necessitates the reconciliation of both the sets of accounts to identify the causes for deviation.

Bba Cost Accounting Reconciliation of Cost And Financial Accounts

Reasons for Necessity of Reconciliation 

The important reasons necessitating the reconciliation of cost and financial accounts as follows:

  • The reasons for difference in profit or loss in cost accounts and financial accounts is analysed and highlighted.
  • The accuracy of cost accounting methods and practices followed by the concern like absorption and recovery or overheads, depreciation allowance, inventory valuation is cross verified with the financial accounts.
  • The reliability of cost accounting data and financial accounting data is verified by reconciling both the accounts.
  • Reconciliation of cost and financial accounts help in standardisation of policies like inventory valuation, overhead absorption, depreciation provisions etc.
  • It promotes co-ordination and co-operation between financial accounting and costing departments in generating accurate and reliable accounting data for meeting statutory requirements and generation of data for managerial decision making.
  • It helps the management in identification of reasons for deviation in profit between cost accounts and financial accounts for internal control and efficient management of operations.
  • It explains difference in profit or loss shown in cost accounts and financial accounts and any mistakes in preparation of accounts are brought out and ensures in arithmetical accuracy of both sets of accounts and increase the reliability of both the accounts.
  • Reconciliation of both the accounts is necessary to ensure that there is no over or under recovery of overheads.

Bba Cost Accounting Reconciliation of Cost And Financial Accounts

Reasons for Disagreement 

The difference in profit or loss ascertained in cost accounts and financial accounts is due to the following reasons:

Certain items only shown in financial accounts that are not coming in cost accounts:

  • Profit or loss on sale of fixed assets
  • Discount on issue or redemption of shares and debentures
  • Capital issue expenses
  • Preliminary expenses written off
  • Receipt of interest and dividends on investments
  • Cash discounts and bad debts
  • Miscellaneous income or expenditure not relating to business
  • Distribution of dividends
  • Payment of income – tax
  • Donations
  • Transfer of profits to reserves
  • Goodwill written off
  • Expenses relating to previous year
  • Profit or loss relating to transactions of abnormal or non-recurring nature
  • Lay off wages and retrenchment compensation

Certain Items only Shown in Cost Accounts that are not coming in Financial Accounts

  1. Notional rent on premises owned
  2. Notional interest on capital

 Disagreement Due to under or over absorption of overhead items:

In financial accounts the actual overheads incurred will be accounted. But in cost accounts for ascertainment of cost of production and profitability of cost unit, predetermined overhead  absorption  rates like machine hour rate, direct labour hour rate, percentage of direct material, direct labour, prime cost, factory overhead, factory cost etc. are used for absorption of overheads. The absorption of overheads in cost accounts may be under or over recovered than the actual overheads incurred.

Difference Due to Use of Different Methods of Stock Valuation:

  1. In financial accounts, the stocks of raw materials are valued at cost or market value whichever is lower. Where as in cost accounts stock may be valued under FIFO, LIFO, simple average cost, weighted average cost, standard cost etc.
  2. The finished goods are valued under absorption costing method in financial accounts. But in preparation of cost accounts, the finished stock may be valued under absorption costing, marginal costing, standard costing etc. 

Difference Due to Use of Different Rates of Depreciation:

In financial accounts the amount of depreciation is charged as per the rates given in the companies Act, 1956. But in cost accounts, appropriate and suitable method is used for calculation of the amount of depreciation.

Bba Cost Accounting Reconciliation of Cost And Financial Accounts

Reconciliation of Cost Accounts and Financial Accounts 

The cost accounts and financial accounts are reconciled by preparing any of the following:

  1. Memorandum Reconciliation Account
  2. Reconciliation Statement.


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