Cost Accounting Solved Question Paper May' 2017 (Old Course)
Dibrugarh University B.Com 4th Sem CBCS Pattern
Time: 3 hours
Full Marks: 80
Pass marks: 32
The figures in the margin indicate full marks for the questions
1. (a) Choose the correct answer: 1x4=4
a) Fixed cost per unit decreases/increases with rise in output.
b) For EOQ, Q stands for quality/quantity.
c) Under the Rowan plan, bonus is a fixed/variable percentage.
d) Bases of factory rent apportionment are floor area/direct expenses.
(b) Fill in the blanks: 1x4=4
a) In an oil industry, Process costing method is applied.
b) The perpetual inventory system means a continuous stock-taking system.
c) In process costing, costs are calculated at the end of the each process.
d) Overheads are the sum of indirect material, indirect labour and indirect expenses.
2. Answer the following questions (any four): 4x4=16
a) Distinguish between Cost Accounting and Financial Accounting.
Ans: DISTINGUISH BETWEEN FINANCIAL AND COST ACCOUNTING
Basis
|
Financial Accounting
|
Cost Accounting
|
1. Nature
|
Financial accounts are maintained on the basis of historical records.
|
Cost accounts lay emphasis on both historical and predetermined costs.
|
2. Use
|
Financial Accounting is used even by outside entities.
|
Cost Accounting is used only the management of the concern.
|
3. System
|
Financial Accounting uses the double-entry system for recording financial data.
|
Cost Accounting does not use the double-entry for collecting cost data.
|
4. Scope
|
Financial Accounting covers all items of income and expenditure whether related to the cost centers or not,
|
Cost Accounting covers all items related to a cost centre.
|
5. Reports
|
Financial Accounting results are shown P&L A/c and balance sheet.
|
Cost Accounting results are shown in Cost Sheet/ Coating Profit & Loss A/c/ Reports Contract A/c/ Process A/c.
|
b) What do you mean by perpetual inventory system?
Ans: Perpectual Inventory System: Perpetual Inventory system means continuous stock taking. CIMA defines perpetual inventory system as ‘the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value’. Under this system, a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of materials is always available. Entries in the Bin Card and the Stores Ledger are made after every receipt and issue and the balance is reconciled on regular basis with the physical stock. The main advantage of this system is that it avoids disruptions in the production caused by periodic stock taking. Similarly it helps in having a detailed and more reliable check on the stocks. The stock records are more reliable and stock discrepancies are investigated and appropriate action is taken immediately.
Salient features of perpetual inventory system
a) It requires more efforts to maintain inventory under this method.
b) Quantity balances shown by the store ledger and bin cards are reconciled.
c) A number of items are physically checked systematically and by rotation.
d) The method is comparatively costly as compared to periodical inventory system.
e) Store ledger and bin cards keeps inventory record up-to date and decent.
f) The method applies to those concerns usually that sell high-value items (Such as car, personal computer, equipments etc.) not at a large quantity as compared to items under periodic system.
c) Explain the causes of labour turnover.
Ans: Meaning: Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
Causes of Labour turnover: The causes for labour turnover can be broadly classified under three heads.
(1) Personal Causes
(2) Unavoidable Causes
(3) Avoidable Causes
i) Personal Causes: Some of the employees may leave the organization on account of personal reasons as given below:
(a) Circumstances of family.
(b) Retirement on reaching the prescribed age.
(c) Change in material status in case of women employees.
(d) Dislike for the job or place;
(e) Death of the employee.
(f) Employee getting recruited in a better job.
(g) Permanent disability due to accidents.
(h) Involvement of employee in activities of moral turpitude.
ii) Unavoidable Causes: In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence.
(c) Retrenchment of workers by the company on account of shortage of work.
iii) Avoidable Causes: Some of the employees may leave the organization account of the following reasons:
(a) Non availability of promotion opportunities
(b) Dissatisfaction with incentive schemes
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure.
d) Explain different methods of calculating overheads.
Ans: The methods used for absorption are as follows:
1. Direct Material Cost: Under this method, the overheads are absorbed on the basis of percentage of direct material cost. The following formula is used for working out the overhead absorption percentage: Budgeted or Actual Overhead Cost/ Direct Material Cost X 100
2. Direct Labor Cost Method: This method is used in those organizations where labor is a dominant factor in the total cost. Under this method, the following formula is used for calculating the overhead absorption rate: Budgeted or Actual Overheads/ Direct Labor Cost X 100
3. Prime Cost Method: This method is an improvement over the first two methods. Under this method, the Prime Cost is taken as the base for calculating the percentage of absorption of overheads by using the following formula: Budgeted or Actual Overheads/ Prime Cost X 100
4. Production Unit Method: This method is used when all production units are similar to each other in all respects. Total overhead expenses are divided by total production units for computing the rate per unit of overheads and overheads are absorbed in the product units. If a firm produces more than one products and if they are not uniform to each other, equivalent units are calculated to find out the rate of overheads per unit. The formula of absorption of overheads is as follows: Overhead absorption rate = Budgeted or Actual Overheads/Production Units
5. Direct Labor Hour Method: Under this method, the rate of absorption is calculated by dividing the overhead expenses by the direct labor hours. The formula is as follows. Budgeted or Actual Overhead Expenses/Direct Labor Hours
6. Machine Hour Rate: Where machines are more dominant than labor, machine hour rate method is used. CIMA defines machine hour rate as ‘actual or predetermined rate of cost apportionment or overhead absorption, which is calculated by dividing the cost to be appropriated or absorbed by a number of hours for which a machine or machines are operated or expected to be operated’. In other words, machine hour rate is the cost of operating a machine on per hour basis. The formula for calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/ Machine Hours
7. Selling Price Method: In this method, selling price of the products is used as a basis for absorbing the overheads. The logic used is that if the selling price is high, the product should bear higher overhead cost. Ratio of selling price is worked out and the overheads are absorbed.
e) Distinguish between Job Costing and Process Costing.
Ans: Difference between Job costing and Process Costing
Basis of distinction
|
Job Costing
|
Process Costing
|
Basic
|
Job costing is used when the cost object is an individual (or a lot/batch) unit or a distinct product or service.
|
Process Costing is generally used for a mass of identical product or service.
|
Accumulation of Cost
|
Costs can be accumulated by each individual product or service.
|
The Costs are accumulated in a period. The total costs in a period are divided over the number of units to get an average unit cost.
|
Cost Determination
|
Job costing is done against a specific order being produced.
|
Costs are compiled for each process over a period of time.
|
Cost Calculation
|
Costs are calculated when a job is over.
|
Costs are calculated at the end of a cost period like an accounting year.
|
Transfer
|
There are usually no transfers of costs from one job to another.
|
Transfer of costs from one process to another is made as the product moves from one process to the other.
|
Also Read: Cost Accounting Question Papers and Solutions
3. (a) Following information has been obtained from the cost records of Aditya Chemical Ltd. for 2016:
Particulars
|
Rs.
|
Finished goods on 1.1.2016
Raw materials on 1.1.2016
Work-in-progress on 1.1.2016
Direct Labour
Purchase of raw material
Indirect labour
Heat, light and power
Factory insurance and taxes
Repairs to plant
Factory supplies
Depreciation on factory building
Depreciation on plant
Finished goods on 31.12.2016
Raw materials on 31.12.2016
Work-in-progress on 31.12.2016
|
50,000
10,000
14,000
1,60,000
98,000
40,000
20,000
5,000
3,000
5,000
6,000
10,000
1,70,000
13,000
78,000
|
No office and administrative expenses were incurred during the year 2016. Prepare a statement of cost for the year 2016 showing (i) cost of raw material consumed, (ii) factory cost and (iii) cost of goods sold. 11
Cost Sheet
Particulars
|
Amount
|
Opening Stock of R/M
Add: Purchase of R/M
|
10,000
98,000
|
Less Closing stock of R/M
|
1,08,000
13,000
|
(1) R/M consumed
Add: Wages
|
95,000
1,60,000
|
Prime cost
Add: Factory overheads:
Indirect Labour
Heat, light and power
Factory insurance and taxes
Repairs to plant
Factory supplies
Depreciation on factory building
Depreciation on plant
|
2,55,000
40,000
20,000
5,000
3,000
5,000
6,000
10,000
|
Works cost incurred
Add: Opening W-I-P
Less: Closing W-I-P
|
3,44,000
14,000
78,000
|
(2) Works cost/Cost of production
Add: Opening stock of FG
Less: Closing stock of FG
|
2,80,000
50,000
1,70,000
|
(3) cost of goods sold
|
1,60,000
|
Or
(b) What do you understand by cost classification? Discuss the various bases of classification of costs and give examples of each class of cost. 3+5+3=11
4. (a) The products A and B are used as follows:
Particulars
|
A
|
B
|
Normal consumption
Maximum consumption
Minimum consumption
Reorder quantity
Reorder period
|
200 units Per week
300 units Per week
100 units Per week
1,000 units
4 to 5 weeks
|
100 units Per week
200 units Per week
50 units Per week
500 units
2 to 4 weeks
|
For each product, calculate the following: 11
1) Reorder level
2) Maximum level
3) Minimum level
4) Average stock level
Solution:
Or
(b) What do you understand by economic order quantity (EOQ)? Describe the methods pricing materials issues with its advantages and disadvantages. 4+7=11
Ans: Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.
In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.
The quantity to order at a given time must be determined by balancing two factors: (1) the cost of possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time.
The carrying cost of inventory may include:
a) Interest on investment of working capital
b) Property tax and insurance
c) Storage cost, handling cost
d) Deterioration and shrinkage of stocks
e) Obsolescence of stocks.
Formula of Economic Order Quantity (EOQ): The different formulas have been developed for the calculation of economic order quantity (EOQ). The following formula is usually used for the calculation of EOQ.
A = Demand for the year
Cp = Cost to place a single order
Ch = Cost to hold one unit inventory for a year
EOQ =
5. (a) A worker takes 12 hours to complete a work on daily wages and 8 hours on a scheme of payment by results. Worker’s day rate is Rs. 6 per hour. The cost of material of the product is Rs. 20 and the overheads are recovered at 200% of the total wages. Calculate the factory works cost of the product under (i) Rowan plan and (ii) Halsey scheme. 11
Ans: Calculation of wages:
a) Rowan Plan = TT * Rate Per Hour + TS/ST (TT * Rate per hour) = 8*6+ 4/12(8*6) = Rs. 64
b) Halsey Plan = TT * Rate Per hour + 50% (TS*Rate per hour) = 8*6+50% (4*6) = Rs. 60
Calculation of Works cost
Particulars
|
Rowan Method
|
Halsey Method
|
Material
Wages
|
20
64
|
20
60
|
Prime Cost
Add: Factory Overheads
|
84
128
|
80
120
|
Works Cost
|
212
|
200
|
Or
(b) Write short notes on: 3+3+5=11
a) Idle time: Idle time refers to the labour time paid for but not utilized on production. It, in fact, represents the time for which wages are paid, but during which no output is given out by the workers. This is the period during which workers remain idle.
Types of Idle Time and its treatment
a. Normal idle time is inherent in any job situation and thus it cannot be eliminated or reduced. For example: time gap between the finishing of one job and the starting of another; time lost due to fatigue etc. The cost of normal idle time should be charged to the cost of production. This may be done by inflating the labour rate. It may be transferred to factory overheads for absorption, by adopting a factory overhead absorption rate.
b. Abnormal idle time is defined as the idle time which arises on account of abnormal causes; e.g. strikes; lockouts; floods; major breakdown of machinery; fire etc. Such an idle time is uncontrollable. The cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss Account.
Reasons for idle time: According to reasons, idle time can be classified into normal idle time and abnormal idle time. Normal idle time is the time which cannot be avoided or reduced in the normal course of business.
a) The main reasons for the occurrence of normal idle time are as follows:
b) Time taken by workers to travel the distance between the main gate of factory and the place of their work.
c) Time lost between the finish of one job and starting of next job.
d) Time spent to overcome fatigue.
e) Time spent to meet their personal needs like taking lunch, tea etc.
The main reasons for the occurrence of abnormal idle time are:
a) Due to machine break downs, power failure, non-availability of raw materials, tools or waiting for jobs due to defective planning.
b) Due to conscious management policy decision to stop work for some time.
c) In the case of seasonal goods producing units, it may not be possible for them to produce evenly throughout the year. Such a factor too results in the generation of abnormal idle time.
b) Overtime: Overtime is the amount of wages paid for working beyond normal working hours as specified by Factories Act or by a mutual agreement between the workers union and the management. There is a practice is to pay for overtime work at higher rates. Hence, payment of overtime consists of two elements, the normal wages e.g., the usual amount, and the extra payment i.e., the premium. This amount of extra payment paid to a worker under overtime is known as overtime premium.
Treatment of Overtime Premium in Cost Accounting
a) If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.
b) If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which works overtime.
c) If overtime is worked in a department, due to the fault of another department, the overtime premium should be charged to the latter department.
d) Overtime worked on account of abnormal conditions such as flood, earthquake etc. should not be charged to cost but to costing P/L A/c.
c) Labour turnover: Meaning: Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
Causes of Labour turnover: The causes for labour turnover can be broadly classified under three heads.
(1) Personal Causes
(2) Unavoidable Causes
(3) Avoidable Causes
i) Personal Causes: Some of the employees may leave the organization on account of personal reasons as given below:
(a) Circumstances of family.
(b) Retirement on reaching the prescribed age.
(c) Change in material status in case of women employees.
(d) Dislike for the job or place;
(e) Death of the employee.
(f) Employee getting recruited in a better job.
(g) Permanent disability due to accidents.
(h) Involvement of employee in activities of moral turpitude.
ii) Unavoidable Causes: In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence.
(c) Retrenchment of workers by the company on account of shortage of work.
iii) Avoidable Causes: Some of the employees may leave the organization account of the following reasons:
(a) Non availability of promotion opportunities
(b) Dissatisfaction with incentive schemes
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure.
6. (a) A machine purchased for Rs. 55,000. It was installed in a shop over 1/5th of its floor area at an additional cost of Rs. 5,000. The working life of the machine as also the scrap value was estimated at 10 years and Rs. 5,000 respectively. From the following details, compute the machine hour rate: 12
Particulars
|
Rs.
|
Rent and rates of the shop p.a.
General lighting of the shop p.m.
Repairs and maintenance for the machine p.a.
Insurance premium p.a.
Supervisor’s salary p.m.
|
5,000
500
3,000
2,400
1,000
|
It is estimated that the supervisor devotes 1/4th of his time for the machine. The cost of power is Rs. 20 per 100 units and the machine consumed 10 units per hour. Normal working hour of the machine is estimated at 1200 but during the year it actually worked for 1000 hours.
Or
(b) What do you mean by overhead cost? Explain the various classifications of overhead cost and its bases of apportionment. 4+8=12
Ans: Meaning and Definition of overheads
Aggregate of all expenses relating to indirect material cost, indirect labour cost and indirect expenses is known as Overhead. Accordingly, all expenses other than direct material cost, direct wages and direct expenses are referred to as overhead.
According to Wheldon, Overhead may be defined as "the cost of indirect material, indirect labour and such other expenses including services as cannot conveniently be charged to a specific unit."
Blocker and WeItmer define overhead as follows: "Overhead costs are operating cost of a business enterprise which cannot be traced directly to a particular unit of output. Further such costs are invisible or unaccountable."
Classification of Overheads
Classification of overheads is the process of grouping of costs based on the features and objectives of the business organization. Classification is made according to following basis:
(a) Classification according to Elements: According to this classification overheads are divided according to their elements. The classification is done as per the following details.
1. Indirect Materials: Materials which cannot be identified with the given product unit of cost center is called as indirect materials. For example, lubricants used in a machine is an indirect material, similarly thread used to stitch clothes is also indirect material. Small nuts and bolts are also examples of indirect materials.
2. Indirect Labour: Wages and salaries paid to indirect workers, i.e. workers who are not directly engaged on the production are examples of indirect wages.
3. Indirect Expense: Expenses such as rent and taxes, printing and stationery, power, insurance, electricity, marketing and selling expenses etc are the examples of indirect expenses.
(b) Functional Classification: Overheads can also be classified according to their functions. This classification is done as given below.
1. Manufacturing Overheads: Indirect expenses incurred for manufacturing are called as manufacturing overheads. For example, factory power, works manager’s salary, factory insurance, depreciation of factory machinery and other fixed assets, indirect materials used in production etc. It should be noted that such expenditure is incurred for manufacturing but cannot be identified with the product units.
2. Administrative Overheads: Indirect expenses incurred for running the administration are known as Administrative Overheads. Examples of such overheads are, office salaries, printing and stationery, office telephone, office rent, electricity used in the office, salaries of administrative staff etc.
3. Selling and Distribution Overheads: Overheads incurred for getting orders from consumers are called as selling overheads. On the other hand, overheads incurred for execution of order are called as distribution overheads. Examples of selling overheads are sales promotion expenses, marketing expenses, salesmen’s salaries and commission, advertising expenses etc. Examples of distribution overheads are warehouse charges, transportation of outgoing goods, packing, commission of middlemen etc.
4. Research and Development Overheads: In the modern days, firms spend heavily on research and development. Expenses incurred on research and development are known as Research and Development overheads.
(c) Classification according to Behavior: According to this classification, overheads are classified as fixed, variable and semi-variable. These concepts are discussed below.
1. Fixed Overheads: Fixed overheads are commonly described as those that do not vary in total amount with increase or decrease in production volume, for a given period of time, may be a year. Salaries, depreciation of fixed assets, property taxes, are some of the examples of fixed costs. Total fixed costs remain same irrespective of changes in volume of production but per unit of fixed cost is variable. It increases if production decreases while if production increases, it decreases.
2. Variable Overheads: Variable overheads are those which go on increasing if production volume increases and go on decreasing if the volume decreases. Such increase or decrease may or may not be in the same proportion. Variable overheads are generally considered to be controllable as they are directly connected with the production.
3. Semi-variable Overheads: These types of overheads remain constant over a relatively short range of variation in output and then are abruptly changed to a new level. In other words, they remain same up to a certain level of output and after crossing that level, they start increasing. For example, supervisor’s salary is treated as fixed but if a decision is taken to operate a second shift, additional supervisor may have to be appointed which results into increase in the salary of the supervisor. This indicates that it is a semi-variable overheads. Similarly, maintenance expenditure, fire insurance are also semi-variable overheads.
Bases of Apportionment: Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. The process of distribution is usually known as ‘Primary Distribution’.
Following are the main bases of overhead apportionment utilised in manufacturing concerns:
(i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc.
(ii) Direct Labour/Machine Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department.
(iii) Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses.
(iv) Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers’ insurance, their contribution to provident fund, workers’ compensation etc.
(v) Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc.
(vi) Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc.
(vii) Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.g. rates, taxes, depreciation, maintenance, insurance charges of the building etc.
(viii) Light Points: This is used for apportioning lighting expenses.
(ix) Kilowatt Hours: This basis is used for the apportionment of power expenses.
(x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. This is used for distributing lighting, electric power, works manager’s salary, internal transport, steam, water charges etc. when these are used for processes.
7. (a) A product posses through three processes for completion. During December 2016, 1000 units were produced. The data relating to the process were as follows:
Particulars
|
A (Rs.)
|
B (Rs.)
|
C (Rs.)
|
Material
Labour
Direct Expenses
|
30,000
25,000
5,000
|
15,000
20,000
21,600
|
10,000
15,000
9,050
|
The indirect expenses for the period were Rs. 14,000. The scraps of process B and C were sold at Rs. 1,450 and Rs. 1,660 respectively. Prepare the Process Accounts and cost of Production Account. 11
Process A Account
Particulars
|
Per Unit
|
Amount
|
Particulars
|
Per Unit
|
Amount
|
To Materials
To Labour
To Direct Expenses
To Indirect Expenses
(Absorbed on the basis
of wages: 5:4:3)
|
30
25
5
5.83
|
30,000
25,000
5,000
5,833
|
By Process B Account
|
65.83
|
65,833
|
65.83
|
65,833
|
61.974
|
65,833
|
Process B Account
Particulars
|
Per Unit
|
Amount
|
Particulars
|
Per Unit
|
Amount
|
To Process A Account
To Materials
To Labour
To Direct Expenses
To Indirect Expenses
(Absorbed on the basis of wages: 5:4:3)
|
65.83
15
20
21.60
4.67
|
65,833
15,000
20,000
21,600
4,667
|
By Normal Loss
By Process C Account
|
1.45
125.65
|
1,450
1,25,650
|
127.10
|
1,27,100
|
127.10
|
1,27,100
|
Process C Account
Particulars
|
Per Unit
|
Amount
|
Particulars
|
Per Unit
|
Amount
|
To Process B Account
To Materials
To Labour
To Direct Expenses
To Indirect Expenses
(Absorbed on the basis
of wages)
|
125.65
10
15
9.05
3.5
|
1,25,650
10,000
15,000
9,050
3,500
|
By Normal Loss
By Process C Account
|
1.66
161.54
|
1,660
1,61,540
|
163.20
|
1,63,200
|
163.20
|
1,63,200
|
(b) Explain the following: 5+6=11
1. Difference between Cost Audit and Financial Audit.
2. Reconciliation of Cost Account and Financial Account.
Ans: Reconciliation of Cost Accounting and Financial Accounting: When cost accounts and financial accounts are maintained in two different sets of books, there will be prepared two profit and loss accounts - one for costing books and the other for financial books. The profit or loss shown by costing books may not agree with that shown by financial books. Such a system is termed as, ‘Non-Integral System’ whereas under the integral system of accounting, there are no separate cost and financial accounts. Consequently, the problem of reconciliation does not arise under the integral system.
However, where two sets of accounting systems, namely, financial accounting and cost accounting are being maintained, the profit shown by the two sets of accounts may not agree with each other. Although both deal with the same basic transactions like purchases consumption of materials, wages and other expenses, the difference of purpose leads to a difference in approach in a collection, analysis and presentation of data to meet the objective of the individual system.
Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organisation for a relatively long period, usually a year, without being too much concerned with cost computation, whereas cost accounts are concerned with the ascertainment of profit or loss made by manufacturing divisions or products for cost comparison and preparation and use of a variety of cost statements. The difference in purpose and approach generally results in a different profit figure from what is disclosed by the financial accounts and thus arises the need for the reconciliation of profit figures given by the cost accounts and financial accounts.
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