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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 :
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.
c
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.)
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 :
Examples of income which are recorded in the financial books only are :
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
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. :
(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.
(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
Work in Progress :
Materials 48
Labour 32
Overhead (Factory) 112
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
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.
(A-B) 3,100
" #
$ ##%%
Rs. Rs. Rs. Rs.
A statement reconciling profit as per financial accounts with that as per cost accounting records
prepared by firm is also given below. :
Reconciliation Statement
Other items :
Prepare the following accounts as they would appear in the cost records :