Reconciliation of profits, Cost Accounting

Reconciliation of Profits

Reconciliation of profits disclosed by Financial Accounts and Costing Accounts in an interlocking system, While interlocking cost accounting system is applied, there will forever be differences between the profits appeared in the financial accounts and that appeared in the financial accounts even whether there are no errors in either accounts. This disparity in profits is caused via the different ways of recording accounting entries in the cost books and the financial books. As like this reason, the two profit figures in the set of the two accounts must be periodically reconciled whether they are to be meaningful. This reconciliation is done using accounts identify as the Memorandum Reconciliation Account. Differences among the profit figures in the financial books and the cost books are caused by factors like:

1.Items appeared merely by one set of Accounts that is Items appearing in the financial accounts and not in the cost books and vice versa. 

(a)  Item appeared only in the financial books involve:

  1. Losses on disposal of assets
  2. Stamp duty and other expenses on issues and transfers of capital stock or shares, debentures, bonds, etc
  3. Losses on investment
  4. Interest on bank loans
  5. Discounts on debentures and bonds.
  6. Dividends obtained
  7. Profits arising from sale of fixed asset
  8. Dividends paid
  9. Rent obtainable however excluding such portion receivable from sub-letting part of the business premises whether it has been involved in the cost accounts.

(b) Items shown only in the cost books: These are generally notional charges hence not real.

They involve as:

- Interest on capital working in production

- Notional rental charges of premises owned

The above two notional costs signifies the opportunity cost of using the capital in the business quite than investing it outside the business.

1. Different bases of Stock Valuation 

In cost accounts stocks are valued differently, and financial accounts; the financial stock is valued on the lower of cost and total realizable value or mark value. The valuation of stocks in cost accounts is either based on weighted average or FIFO or LIFO.  This employ of different bases in valuing stocks will affect the losses/profit appeared in the financial or cost accounts thus the need for reconciliation of the two.

2. Different Treatment of Overheads

In cost accounts, indirect expenses are recovered like overheads based on estimated expenditure and aligned along with the estimated level of production. Such results in beneath or over-absorption of overheads and this should be taken into account while reconciling the profits of the two sets of accounts. However in the financial accounts, indirect expenses are recorded on the real cost and charged to production account.

Posted Date: 2/6/2013 12:00:14 AM | Location : United States







Related Discussions:- Reconciliation of profits, Assignment Help, Ask Question on Reconciliation of profits, Get Answer, Expert's Help, Reconciliation of profits Discussions

Write discussion on Reconciliation of profits
Your posts are moderated
Related Questions
Direct Material Usage Variance Refers to the difference among the actual quantity utilized and the standard quantity particular for the actual production, all valued at the st

Marginal analysis finds to equalize the cost of producing one more item (marginal costs) with the revenue gained from selling one more item (marginal revenue).

At the end of Ehlinger Department Store's fiscal year on December 31, 2012, these accounts appeared in its adjusted trial balance: Freight-In $ 7,200

Consider the following two mutually exclusive projects:   Whichever project you choose, if any, you require a 15 percent return on your investment.   a. If you apply the payb

Suppose the Danny can prepare 50 pizzas or 100 sandwiches in an hour and Steve can produce 15 pizzas or 9 sandwiches. a) Draw each individual's PPF. b) Calculate the oppor

I need an explanation of how a bin card is done

ANNUAL DEMAND = 2400 UNITS ORDERING COST PER UNIT = RS.4.00/- UNIT PRICE = RS 2.40/- STORAGE COST = 2% P.A INTEREST RATE = 10 % P.A LEAD TIME = HALF MONTH CALCULATE ECONOMIC ORDER

what is planning and what part of this activity would you describe as planning in the situasion above

Alameda Service center just purchased an automobile hoist for $ 14000. The hoist has a 6 year lifeand an estimated salvage value of $1481. Installation costs were $3020, and freigh

Describe the meaning and relevance of interdependence of variances when reporting to managers.