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Ans: In the modern computer age the use of computer knowledge and accounting software¶s
has helped the field of Financial and Cost Accounting in a big way. In fact, computers work at a
very high speed and can process voluminous data generating desired output in no time. Output
produced is precise and accurate. Computers can work for hours without any fatigue. Th ey can
bring out different Financial Accounting and Cost Accounting statements and reports accurately
in a presentable form. Financial accounts and Cost accounts show their results accurately and
precisely, when maintained on a computer system, but the pr ofit shown by one set of books may
not agree with that of the other set.

The main reasons for the disagreement of the profit figures shown by the two set of books is the
absence of certain items which appear in financial books only and are not recorded in cost
accounting books. Similarly, there may be some items which appear in cost accounts but do not
find a place in the financial books. Some examples which affects it are as below :

i.. Loss / profit on sale of fixed assets.


ii. Expenses on stamp duty, discount and other expenses relating to the issue and transfer
of shares and debentures.
iii. Fee received on issue and transfer of shares etc.
iv. Interest on bank loan, mortgage etc.
v. Interest received on bank deposits and other investments.
vi. Fines and penalties
vii. Dividend received on investments in shares.
viii. Rental income etc.
ix. Under or over recovered expenses.
X Difference due to varying basis of valuation of stock or in the matter of charging
depreciation.

Under the situation of differential profit figure shown by financial and cost accounts, it is
necessary to reconcile the results (profit/loss) shown. Such a reconciliation proves arithmetical
accuracy of data, explains reasons for the difference in the two sets of books and aff ords
reliability to them. Hence, the reconciliation of cost and financial accounts is essential and not
redundant even in the modern age of computer.


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When cost and financial accounts are maintained separately, the profit sh own by one set of
books may not agree with that of the other set. In such a situation, it becomes necessary to
reconcile the results (profit/loss) shown by two sets of books.
Causes for difference between; profit shown by cost and financial accounts

There are certain items, which appear in financial books only and are not recorded in cost
accounting books e.g. loss on sale of fixed assets; expenses on stamp duty; interest on bank
loan etc. Similarly, there may be some items, which appear in cost accounts only and do not find
a place in the financial books e.g. notional rent; notional interest etc.)

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In cost accounts, overheads are generally absorbed on the basis of a pre -determined overhead
rate, whereas in financial accounts actual expenditure on overhea ds is recorded, this will also
cause a difference between the figures of profit shown under financial and cost accounts.

Different methods of valuation of closing stock adopted in cost and financial a accounts will also
cause a difference in the results s hown by the two sets of books. In financial accounts the
method generally followed is cost or market price, whichever is less whereas in cost accounts
different methods of pricing of material issues such as LIFO, FIFO, average etc are used.

Use of different methods of depreciation is also responsible for the variation of profit shown by
two sets of books. In financial accounts, depreciation may be charged according to writt3en
down value method whereas in cost accounts it may be charged on the basis of t he life of the
machine.

Abnormal items not included in cost accounts also causes a difference in profit. If such items of
expenses are included, cost ascertained will not be correct.

 
 
       
   
        
   




Ans: Reasons for disagreement of ³Profits as per Financial accounts and Cost accounts are as
below. There are certain items which are included in Financial accounts but not in Cost
accounts. Likewise there are ce rtain items which are in Cost accounts but not Financial
accounts.

Examples of financial charges which appear only in financial books are :

i. Loss on the sale of fixed assets and investments.


ii. Interest on bank loans, mortgage etc.
iii. Expenses relating to the issue and transfer of shares and debentures like stamps duty
expenses; discount on shares and debentures etc.
iv. Penalties and fines.

Examples of income which are recorded in the financial books only are :

i. Profit on the sale of investments and fixed assets.


ii. Interest received on investments and bank deposits.
iii. Dividend received on investment in shares.
iv. Fees received on issue and transfer of shares etc.
v. Rental income.

There are abnormal or special items of expenditu re and income which are not included in the
cost of production. Their inclusion in cost of production, would result into incorrect cost
ascertainment. Different bases of charging depreciation also accounts for the disagreement of
profits as per financial and cost accounts. Different methods of valuation of closing stock
adopted in cost and financial accounts will also account for the difference in profits under
financial and cost accounts.


 The following figures have been extracted from the Cost Rec ords of a manufacturing unit:

 Stores : Rs.
Opening Balance 30,000
Purchases 1,60,000
Transfers from work-in-Progress 80,000

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Issues to work-in-Progress 1,60,000


Issues to Repairs and Maintenance 20,000
Deficiencies found in stock taking 6,000

Work-in-Progress :
Opening Balance 60,000
Direct Wages applied 60,000
Overheads applied 2,40,000
Closing balance 40,000

 Finished products : Entire output is sold at a profit of 10% on actual cost from work -in-progress
.
 Others : wages incurred Rs. 70,000 ; Overhead incurred Rs. 2,50,000.

Items not included in Cost Records : Income from investments Rs. 10,000 . Profit and Loss
Account, Profit & Loss Account and Reconciliation statement.

 The following information is available from the financial books of a company having a normal
production capacity of 60,000 units for the year ended 31 st March, 2004. :

(i) Sales Rs.10,00,000 (50,000 units).

(ii) There was no opening and closing stock of finished units


.
(iii) Direct material and direct wages cost were Rs,5,00,000 and Rs.2,50,000 respectively.

(iv) Actual factory expenses were Rs.1,50,000 of which 60% are fixed .

(v) Actual administrative expenses were Rs.45,000 which are complete fixed.

(vi) Actual selling and distributi on expenses were Rs.30,000 of which 40% are fixed.

(vii) Interest and dividends received Rs.15,000.

You are required to :

(a) Find out profit as per financial books for the year ended 31 st March, 2004 ;
(b) Prepare the cost sheet and ascertain the pr ofit as per cost accounts for the ended 31 st
March, 2004. assuming that the indirect expenses are absorbed on the basis of normal
production capacity; and
(c ) Prepare a statement reconciling profits shown by financial and cost books.

 The financial records of Modern Ltd. reveal the following for the year ended 30.6.2003 :

Rs. In thousands.
Sales (20,000 units). 4,000
Materials 1,600
Wages 800

Factory Overheads 720


Office and Administrative Overheads 416
Selling and Distribution Overheads 288
Finished Goods (1,230 units). 240
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Work in Progress :
Materials 48
Labour 32
Overhead (Factory) 112

Goodwill written off. 320


Interest of Capital 32

In the Costing Records, factory overheads is charged at 100% wages, administration overhead
10% of conversion cost and selling and distribution overhead at the rate of Rs. 16 per unit sold.

Prepare a statement reconciling the Profit as per cost records with the Profit as per financial
records of the Company.

á The financial Profit and Loss Account for the year ended last of a company shows a net profit of
Rs. 35,45,000. During the course of Cost Audit it was noticed that :

(I) the Company was engaged in trading activity by purchasing goods at Rs. 4,00,000 and
selling it for Rs. 5,00,000 after incurring an expenditure of Rs. 25,000.
(ii) Some old assets were sold off at th e year end fetching a profit of Rs. 60,000.

(iii) A major overhaul of machinery is carried out at a cost of Rs. 12,00,000 and the next such
overhaul will be done only after three years.
(iv) Interest was received amounting to Rs. 2,00,000 from outside in vestments.

(v) Depreciation to the extent of Rs. 2,50,000 was provided on the revaluation value of
assets.

(vi) Work-in-progress valuation for financial accounts does not as a practice take into account
factory overheads. This amount was Rs. 2,45,000 in opening W.I.P. and Rs. 3,75,000 in
closing W.I.P.

Work out the profit as per Cost Accounts and briefly explain the adjustment if any carried out.

 ! A firm of Sports Equipment commenced business on 1/4/03 for manufacturing 2 varieties of bat.
³Senior´ and ³sub-junior´. The following information has been extracted from the accounts
records for the half -year period ended 30/9/03. :
Rs.
(.i) Average material cost per piece of ³Senior´ bat 80
(ii) Average material cost per piece of ³ Sub-junior´ bat 60
(iii) Average cost of labour per piece of ³Senior´ bat 140
(iv) Average cost of labour per piece of ³Sub -junior´ bat 110

(v) Finished goods sold :


Senior 300 pieces
Sub-junior 700 pieces

(vi) Sale price :


-- per piece of ³Senior´ bat 500
-- per piece of ³sub-junior´ bat 390

(vii) Work overhead /expenses incurred during the period 1,20,000

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(viii) Office expenses 68,000

You are required to prepare a statement showing :

the profit per each brand -piece of bat ; charge labour and material at actual average cost, works
cost at 100% on labour cost and office cost at 25% of works cost.

Financial profit for the half -year ending 30/9/03.


Reconciliation between profit as shown by c ost accounts and financial accounts.
  The profit and loss account as shown in the financial books of a company for the year ended
30.9.2003 together with a statement of reconciliation between the profit as per financial and cost
accounts is given below

Profit and Loss Account for the year ended 30.9.2003


Rs. Rs. Rs. Rs.

Opening Stock Sales 15,00,000


Raw Materials 90,000 Closing Stock :-
Work in progress 50,000 Raw Materials 98,000
Finished goods 70,000 Work in progress 53,000
2,10,000 Finished goods 72,000
---------- 2,23,000

Raw Material purchases 5,00,000 Miscellaneous


Direct wages 2,00,000 receipts 45,000
Factory overheads 2,00,000
Administration expenses 1,70,000

Selling & Distribution


Expenses 2,20,000
Preliminary expenses
Written off 75,000

Debenture Interest 30,000


Net Profit 1,63,000
17,68,000 17,68,000

Statement of reconciliation of profit as per financial and cost accounts


Rs.

Profit as per financial accounts


1,63,000

Difference in valuation of stock :

Add : Raw Materials - closing stock 1,200


Work in progress-Opening stock 1,300
Finished goods - opening stock 2,000
- Closing stock 1,000
Total (A) 5,500

Less : Raw Materials - Opening stock 1,650


Work in progress - closing stock 750
Total (B) 2,400

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(A-B) 3,100

(b) Other items :


Add : Preliminary expenses written off 75,000
Debenture interest 30,000
1,05,000

Less : Miscellaneous receipts 45,000 60,000


Profit as per Cost Accounts 2,26,100

You are required to calculate the profit as per ledger accounts


ü Gemini Industries maintains separate books for financial accounting and cost accounting.
The Financial Profit and Loss Account of the company for the year ended 31/3/2003 is given
below :

 
 "  #  
$ ##%% 

Rs. Rs. Rs. Rs.

To Opening bal. Of inventory : By Sales


36,08,000
Raw materials 2,00,000 By Closing bal. of inventory :
Work-in-progress 50,000 Raw materials 1,80,000
Finished goods 1,50,000 4,00,000 Work-in-progress 40,000
To Purchase of raw materials 15,40,000 Finished goods 1,60,000 3,80,000
To wages 4,80,000 By Misc. income 22,000
To Factory overheads 2,60,000
To Admn. Overheads 2,40,000

To Distrn. and selling Overheads 1,80,000


To Debenture interest 40,000
To Preliminary expenses written off 50,000
To Net profit 8,20,000 ËËË
40,10,000 40,10,000

A statement reconciling profit as per financial accounts with that as per cost accounting records
prepared by firm is also given below. :

Reconciliation Statement

Profit as per profit and loss account 8,20,000

(a) Difference in valuation of inventory :

Deduct. Raw materials ± opening balance 20,000


Work-in-progress ± opening balance 12,000
Work-in-progress ± closing balance 4,000
Finished goods ± opening balance 30,000
66,000
Add. Raw materials ± closing balance 30,000
Finished goods ± closing balance 15,000 45,000 21,000

Other items :

Add. Debenture interest 40,000


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Preliminary expenses written off 50,000


90,000
Deduct Misc. income 22,000 67,000
Profit as per costing profit and loss account 8,67,000

Prepare the following accounts as they would appear in the cost records :

(i) Raw materials control account


(ii) Work-in-progress account
(iii) Finished goods stock account
(iv) Cost of sales account
(v) Costing profit and loss account.

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