k limited operates separate cost accounting and financial accounting systems the fol 610022

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.