Reconciliation of cost and finance accounting: What are the reasons for differences in profits or losses between cost account and financial accounts?

Cost accounting predicts the future, financial accounting is really what happenned in the past

• Items are shown only in the financial account,
• Items are shown only in cost account,
• Over or under absorption of overhead,
• The difference in valuation of stock,
• Difference methods of charging depreciation,
• Abnormal gain or loss.

following are the main reasons

in costing expenses are charged on the basis of pre-determined percentage of expenses on the basis of standard cost estimates

in financial accountign expenses are charged oin the basis of acutal costs incurred or paid

the above may lead to over or under absorption of overheads and which are the main reasons for difference in both the accounts

Cost accounts are for internal users and based on the activity, whereas financial accounts are for external users and required to captrure items beyond the scope of cost accounts 

cost accountm overheads are charged on the basis of pretermined percentage. But in financial account they are charged with the actual amount. This result over or under absoprtion of overheads in cost account and may be the main reason for difference in profit disclosed by cost account and financial account.

Differences in profit and loss between Finacial accounts and cost accounting may be due to application of standard cost accounting systems during the preparation of periodical costing statements.

in standard costing some performance/Activity/yield variances (including all the variences of  materls, labour and overheads) are recorded  at standard cost due to timing difference of some payments/bills at period end, whcih when adjusted as per actual data, are sorted out and reconciled with Financial accounts

Cost Accounts are only meant to calculate the cost/unit of production. whereas financial accounts are meant for calculating the net profit generated by the entity from its opertaions.

The cost accounts and the financial accounts different from the fact that the cost accounts are concerned with the direct costs of manufacturing, regardless of any additional costs related to the enterprise that may directly affect the profit or loss

The Profit/Loss of Financial Accounting and Cost Accounting differs mainly because of the difference in the method of calculation of profit/loss. Eg:- while calculating the profit in Financial Accounts, the items such as, Provision for different expenses/incomes, Income tax, Interest and Bank charges, Bad debts, Interest on capital etc. is taken into account, but in Costing these items are not taken into account. Also in Cost Accounts, notional income or expenses are taken into account for calculation of Profit/Loss, but not in Financial Accounts. Simalarly, the difference in the valuation of inventory, method of calculation of depreciation, over/under absorption of overheads etc. also cause the reason for the difference in the profit/loss between the Cost Accounts and Financial Accounts.

This is pretty starigt forwrd Cost accounting is direct related (Specific purspose) and the financial accounting will have all other generic costs as a whole.

Cost accounting and financial accounting are different roots of accounting cost accounting basically focuses on the cost of the product and minimizing it at its lowest and which is also useful in production activities also, while when we talk about financial accounting it includes assets and liability factors while doing financial accounting we add various elements like shareholders funds cash flow capital budgeting various taxes which affects profits and losses and varies it from cost accounting