Illustration: Preparation Of A Reconciliation Statement Of Profits As Per Financial Books and As Per Cost Accounting Books

June 11th, 2008 Comments off
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Question:

Company XYZ maintains separate cost and financial ledgers.

The financial accountant has prepared the following Profit Statement from the financial ledger:

Income Statement For 31 st December 2007

Sales

$

$

188,300

Material purchases

73,200

Wages & Salaries

32,490

Expenses excluding depreciation

46,860

Depreciation

17,340

169,890

Stock Increase

2,800

167,090

21,210

Investment Income

8,180

Profit

29,390

The profit reported by the cost accountant was $19,206

The following are discovered:

  1. Neither investment income nor interest charges were included in the cost accounts
  2. Stock valuations in the cost accounts were

$

$

1/12/07

31/12/07

Raw materials

11,800

9,900

Work-in-progress

8,120

8,530

Finished goods

18,910

22,170

  1. The same depreciation methods and rates are used in both ledgers. However, in the cost ledger, depreciation continues to be charged at the rate of 10% per annum on fixed assets which have been fully depreciated. Fixed assets which had cost $468,000 have been fully depreciated in the financial ledger.
  2. In the cost ledger, production overheads incurred comprises:
    • 5% of the cost of materials used
    • 10% of the wages and salaries
    • 80% of the expenses excluding depreciation
    • 60% of the depreciation cost

Absorbed production overheads were $54,310 and the under-absorbed production overheads were carried forward, and not written off to the Income Statement

Required:

Prepare a reconciliation statement, commencing with the financial profit of $28,310 and showing how this can be reconciled to the cost ledger profit of $19,206

Suggested Solution:

Profit as per financial accounts $29,390

Financial Ledger ($)

Cost Ledger ($)

Add ($)

Less ($)

Investment income

8,180

-

-

8,180

Increase in stock

2,800

1770

(W1)

-

1,030

Over-depreciation

3,900

(W2)

-

3,900

Under-absorbed production overhead

2,926

(W3)

2,926

-

2,926

13,110

$(10,184)

Profit as per Cost accounts $19,206

Workings:

(W1):

Opening Stock ($)

Closing Stock ($)

Raw materials

11,800

9,900

Work-in-progress

8,120

8,530

Finished goods

18,910

22,170

Total

38,830

40,600

Increase in stock = $40,600-$38,830 = $1,170

W2:Depreciation in cost ledger = 10% x$468,000/12 = $3,900

W3: Production Overhead:

$

Opening stock of material

11,800

Add: Purchases

73,200

85,000

Less: Closing Stock

9,900

Material Used

75,100

Actual overhead incurred in cost accounts:

$

Material used

5% x$75,100

3,755

Wages & salaries

10% x$32,490

3,249

Expenses

80% x$46,860

37,488

Depreciation

60% x($17,340+$3,900)

12,744

57,236

Less: Overhead absorbed

54,310

Under-absorbed overhead

2,926

 

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