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

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. 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

Profit as per Cost accounts $19,206

Workings:

(W1):

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

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

W3: Production Overhead:

Actual overhead incurred in cost accounts:

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