Integrated Accounting System or Non-integral Accounting System are the common accounting system adopted by manufacturing concern. As we know under Integrated Accounting System, only one set of books is maintained to record both costing and financial transactions, therefore, under this system, both financial accounts and cost accounts give similar results whereas, Non-Integral Accounting System maintains separate books of accounts are maintained for costing and financial transactions, which may give different profits or losses results. When cost account and financial account independently, the profit or loss shown by the cost accounts may not agree with the profit or loss shown by the financial accounts. To overcome this limitation, cost reconciliation statement is prepared to balance the profits or losses shown separately by cost accounts and financial accounts.

Definition of Cost Reconciliation Statement

A statement which is prepared for reconciling or balancing the profit or loss between cost account and financial account is known as cost reconciliation statement. It is a statement where the causes for the difference in net profit or net loss between cost accounts and financial accounts are identified and suitable adjustments are made to mitigate them. In general, Cost Reconciliation Statement is a statement prepared for the purpose of reconciling or agreeing the net profit or net loss result of financial accounts with the results of cost accounts, which are done by making suitable adjustments for the items responsible for the disagreement. 

Why we need Reconciliation?

Reconciliation between the results of the cost and financial accounts is mandatory for following reasons:

i. To check the arithmetical accuracy of cost and financial accounts. 

ii. To identify the reasons or cause of difference in results of cost and financial accounts.

iii. Knowing reasons for difference facilitates internal control. 

iv. Ensures the reliability of cost data.

v. It enhances coordination between cost and financial departments.

vi. It helps in formulation of  policies regarding absorption of overheads, depreciation and stock valuation.

vii. It foster managerial decision-making.

Reason for differences in profit 

The disagreement or differences between cost and financial results are due to the following reasons:

i If Items are shown only in financial account.

ii. If Items are shown only in cost account.

iii. Over or under absorption of overhead. 

iv. Difference in valuation of stock.

v. Different method of charging depreciation.

vi. Abnormal gain or losses.

Solved numerical example of cost reconciliation statement

Q) From the following details, prepare a reconciliation statement of cost and financial accounts and find out profit as per cost account

Net profit as per financial account …………………… Rs 1,00,000

Work overhead under recovery in cost account …………………… Rs 4,000

Depreciation overcharged in financial account …………………… Rs 10,000

Interest received but not included in costing record …………………… Rs 8,000

Income tax provided in financial account …………………… Rs 20,000

Bank interest credited in financial account …………………… Rs 1,000

Solution:

Cost Reconciliation Statement