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:
- Neither investment income nor interest charges were included in the cost accounts
- 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
|
- 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.
- 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
|
|