Reconciliation of Cost and Financial Accounts and Cost Control Reporting (Basics) Questions

Question 1

What is reconciliation?

Accepted Answer

Reconciliation is the process of explaining and adjusting the difference between profit as per cost accounts and profit as per financial accounts.

Question 2

State one reason why cost and financial profits differ.

Accepted Answer

One reason is different overhead absorption in cost accounts compared with actual overheads in financial accounts.

Question 3

Give one example of a purely financial expense.

Accepted Answer

Income tax is a purely financial expense.

Question 4

What is notional cost?

Accepted Answer

Notional cost is an imputed cost recorded in cost accounts without actual cash outflow (e.g., notional rent on owned building).

Question 5

Define over-absorption of overhead.

Accepted Answer

Over-absorption occurs when overhead absorbed in cost accounts is more than the actual overhead incurred.

Question 6

What is a control report?

Accepted Answer

A control report is a periodic report comparing actual performance with standards/budgets and highlighting variances for managerial action.

Question 7

List any three items that appear only in financial accounts and cause profit differences.

Accepted Answer

Items usually appearing only in financial accounts (any three):

1) Income tax, penalties and donations.
2) Profit/loss on sale of fixed assets.
3) Interest received/dividend received (purely financial incomes).
4) Abnormal losses like loss due to fire/flood recorded in financial P&L.

These items do not normally form part of production cost and hence are not included in cost accounts.

Question 8

List any three items that appear only in cost accounts.

Accepted Answer

Items generally appearing only in cost accounts are notional/imputed charges used for decision-making. Any three are:

1) Notional rent for owned building used in production.
2) Notional interest on capital employed.
3) Imputed salary for proprietor/owner-manager (where applied).

These do not involve cash outflow and therefore do not appear in financial accounts.

Question 9

Explain how difference in stock valuation causes difference in profits.

Accepted Answer

Profit differs when opening/closing stock (or WIP) are valued differently in cost and financial accounts.

- If closing stock is valued higher in financial accounts than in cost accounts, financial profit will be higher (because higher closing stock reduces cost of goods sold).
- If closing stock is valued lower in financial accounts, financial profit will be lower.

Stock differences arise due to different overhead absorption, use of standard cost in cost accounts, or accounting policy differences.

Question 10

Differentiate between over-absorption and under-absorption of overhead and state their basic effect on cost profit.

Accepted Answer

Over-absorption vs under-absorption:

| Item | Over-absorption | Under-absorption |
|---|---|---|
| Meaning | Absorbed OH > Actual OH | Absorbed OH < Actual OH |
| Effect on cost of production | Cost accounts charge higher OH | Cost accounts charge lower OH |
| Effect on cost profit (general) | Cost profit tends to be lower | Cost profit tends to be higher |

Hence, these differences must be adjusted in reconciliation.

Question 11

State the format of a reconciliation statement (brief) and the basic rule for add/less adjustments.

Accepted Answer

Reconciliation statement can start from either cost profit or financial profit. A common format is:

Profit as per cost accounts
Add: items increasing financial profit / decreasing cost profit
Less: items decreasing financial profit / increasing cost profit
= Profit as per financial accounts

Basic rule (if starting from cost profit):
- Add financial-only incomes and costs charged only in cost books, and add over-absorbed overhead.
- Subtract financial-only expenses and incomes credited only in cost books, and subtract under-absorbed overhead.

Always label each item clearly to justify the sign.

Question 12

Explain the meaning and purpose of cost control reporting (any three points).

Accepted Answer

Cost control reporting means periodic reports that compare actual performance with standards/budgets and highlight deviations for management action.

Purpose (any three):
1) Early warning system: identifies variances quickly so corrective action can be taken.
2) Responsibility fixation: reports are prepared cost-centre wise to assign accountability.
3) Better control and efficiency: helps reduce wastage of materials, labour time and overheads through focused action.

Thus, control reporting supports continuous improvement and budgetary/standard cost control.

Question 13

Prepare a reconciliation statement (start with profit as per cost accounts) using: Cost profit ₹1,20,000; Interest received ₹5,000; Notional rent (cost only) ₹8,000; Over-absorbed OH ₹6,000; Closing stock undervalued in cost accounts by ₹4,000.

Accepted Answer

Given:
Profit as per cost accounts = ₹1,20,000
Interest received (financial income) = ₹5,000
Notional rent charged in cost accounts = ₹8,000
Over-absorbed overhead in cost accounts = ₹6,000
Closing stock undervalued in cost accounts by ₹4,000 (financial closing stock is higher)

Reconciliation (Cost profit → Financial profit):

Profit as per cost accounts .................................. ₹1,20,000
Add: Items increasing financial profit / decreasing cost profit
1) Interest received (financial only) .......................... 5,000
2) Closing stock higher in financial accounts ................... 4,000
3) Over-absorbed overhead (cost profit reduced by extra OH) ..... 6,000

Less: Items decreasing financial profit / increasing cost profit
1) Notional rent (cost only; not in financial accounts) ......... 8,000

Profit as per financial accounts ............................... ₹1,27,000

Working check:
1,20,000 + 5,000 + 4,000 + 6,000 − 8,000 = 1,27,000

Exam note: Always write a one-line reason for each adjustment (financial-only income, cost-only notional charge, over/under absorption, stock valuation difference).

Question 14

Explain the reasons for difference between cost and financial profits (exam-style, classified).

Accepted Answer

Reasons for difference between cost profit and financial profit can be explained under three headings:

A) Items only in financial accounts (financial-only incomes/expenses)
- Income tax, penalties, donations
- Interest received/dividend received
- Profit/loss on sale of fixed assets
- Abnormal losses like loss by fire/flood
These affect financial profit but are not included in cost accounts.

B) Items only in cost accounts (notional/imputed costs)
- Notional rent for owned premises
- Notional interest on capital employed
- Imputed salary for proprietor/owner-manager
These are included in cost accounts for better decision-making but do not involve cash outflow, so they do not appear in financial books.

C) Items with different treatment/valuation in cost vs financial accounts
1) Stock/WIP valuation differences due to overhead absorption or standard costing.
2) Depreciation differences due to different methods/rates.
3) Over/under absorption of overheads in cost accounts (absorbed vs actual).
4) Provisions and purely financial adjustments in financial books.

Thus, because the objectives and methods differ, reconciliation is required to relate both profits logically.

Question 15

Describe cost control reporting and explain the features of a good control report (exam-style).

Accepted Answer

Cost control reporting means a system of periodic reports prepared for management that compare actual performance with budgets/standards, highlight variances, and support corrective actions.

Examples of control reports:
- material price/usage report
- labour efficiency report
- overhead expenditure report
- budget report by cost centre

Features/characteristics of a good control report (write any 6):
1) Timely: issued quickly so action is possible.
2) Clear and simple: easy to understand; uses tables and comparisons.
3) Relevant: includes only information needed for control and decisions.
4) Comparative: shows standard/budget vs actual, variance and % variance.
5) Exception-oriented: highlights major deviations requiring attention (management by exception).
6) Responsibility-based: prepared cost-centre wise and shows controllable vs uncontrollable items.
7) Action-oriented: includes brief causes and suggested corrective actions.

Thus, control reports convert accounting data into actionable management information.

Reconciliation of Cost and Financial Accounts and Cost Control Reporting (Basics)

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