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.