Reconciliation of cost and financial accounts
K Limited operates separate cost accounting and financial accounting systems. The following manufacturing and trading statement has been prepared from the financial accounts for the quarter ended 31 March:
| (£) | (£) | |
| Raw materials: | ||
| Opening stock | 48 800 | |
| Purchases | 108 000 | |
| 156 800 | ||
| Closing stock | 52 000 | |
| Raw materials consumed | 104 800 | |
| Direct wages | 40 200 | |
| Production overhead | 60 900 | |
| Production cost incurred | 205 900 | |
| Work in progress: | ||
| Opening stock | 64 000 | |
| Closing stock | 58 000 | 6 000 |
| Cost of goods produced | 2 11 900 | |
| Sales | 440 000 | |
| Finishing goods: | ||
| Opening stock | 120 000 | |
| Cost of goods produced | 211 900 | |
| 331 900 | ||
| Closing stock | 121 900 | |
| Cost of goods sold | 210 000 | |
| Gross profit | 230 000 |
From the cost accounts, the following information has been extracted:
| Control account balances at 1 January | (£) |
| Raw material stores | 49 500 |
| Work in progress | 60 100 |
| Finished goods | 115 400 |
| Transactions for the quarter: | (£) |
| Raw material stores | 104 800 |
| Cost of goods produced | 222 500 |
| Cost of goods sold | 212 100 |
| Loss of materials damaged by | |
| Flood (insurance claim pending) | 2 400 |
A notional rent of £4000 per month has been charged in the cost accounts. Production overhead was absorbed at the rate of 185% of direct wages.
You are required to:
(a) Prepare the following control accounts in the cost ledger:
Raw materials stores;
Work in process;
Finished goods;
Production overhead;
(b) Prepare a statement reconciling the gross profits as per the cost accounts and the financial accounts;
(c) Comment on the possible accounting treatment(s) of the under-or over-absorption of production overhead, assuming that the financial year of the company is 1 January to 31 December.
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