Concept And Meaning Of Cost Reconciliation Statement And Need For Reconciliation
Cost Reconciliation Statement
A manufacturing concern may adopt either Integrated Accounting System or Non- Integral Accounting System. Under Integrated Accounting System, only one set of books is maintained to record both costing and financial transaction, therefore, under this system, both financial accounts and cost accounts give similar results. But in Non- Integral Accounting System, separate books are maintained for costing and financial transactions, which may exhibit different results i.e. profits or losses. In other words, when cost accounts and financial accounts are maintained independently by a concern, the profit or loss shown by the cost accounts may not agree with the profit or loss shown by the financial accounts. In this situation, it is needed to reconcile the profits or losses shown differently by cost accounts and financial account by preparing a statement called ' Cost Reconciliation Statement'
A statement which is prepared for reconciling the profit between financial account and cost account is known as cost reconciliation statement. A cost reconciliation statement is a statement reconciling the profits or losses shown by cost accounts and financial accounts. It is a statement wherein the causes responsible for the difference in net profit or loss between cost and financial accounts are established and suitable adjustments are made to remove them. In other words, cost reconciliation statement is prepared for the purpose of reconciling or agreeing the results of financial accounts with the results of cost accounts by making suitable adjustments for the items responsible for the disagreement. In short, it is the statement through which reconciliation or agreement between the results (profits or losses) of cost accounts and financial accounts is effected.
Need For Reconciliation
Reconciliation between the results of two sets of accounts is necessary due to the following reasons:
1. Reconciliation helps to check the arithmetical accuracy of both sets of accounts.
2. Management is enable to know the reasons for the difference in results of both cost and financial accounts.
3. Reconciliation explains reasons for difference which facilitate internal control.
4. Reconciliation ensures the reliability of cost data.
5. Reconciliation promotes co-ordination between cost and financial departments.
6. Reconciliation helps in formulation of policies regarding absorption of overheads and depreciation and stock valuation method.
7. Reconciliation ensures managerial decision-making.