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  Reasons for Difference in Profit

Reasons for Difference in Profit

The profit depicted by financial accounts and cost accounts different on account of the following reasons.

I] Items of Financial Nature not recorded in Cost Accounts:

The following items are not kept in cost accounts because they are of purely financial nature and subsequently the profits differ because these items are recorded in the financial accounts.

Ø   Interest received on bank deposits.

Ø   Interest, Dividend, received on investments.

Ø   Rent received

Ø   Losses on sale of assets

Ø   Bad debts written off, recovered

Ø   Transfer fees received

Ø   Interest on proprietor's capital

Ø   Fines and penalties payable

Ø   Compensation payable.

II] Items Charged to Profit and Loss Account but not Recorded in Cost Accounts:

 The subsequent items are found in the cost accounts but not kept in the financial accounts.

Ø   Corporate taxes

Ø   Appropriations out of profits, like transfer of profits to reserves

Ø   Certain payments like dividend

Ø   Additional provisions of depreciation

Ø   Specific amounts written off like goodwill, patents, preliminary expenses, underwriting commission etc.

III] Items Peculiar in Cost Accounts:

The items explained below are peculiar in cost accounts when their treatment in financial accounts is dissimilar. Therefore there is a variation among the profits shown through both the systems

Ø   Overheads:

In cost accounts, overheads are at last absorbed in the products through calculating the predetermined rate of absorption. In such types of cases, there might be under/over absorption of overheads. The meaning of this is that the overheads actually acquired will not tally with the overheads charged to the product. In financial accounts overheads are all the time taken at actual basis irrespective of under/over absorption of the same. In such types of cases the profits depicted through both the systems will different. Though, if the under/over absorbed overheads are charged to the costing profit and loss account, the profits depicted through financial accounts and cost accounts will not different.

Ø   Valuation of Closing Stock and Work-in-Progress:

The standard of valuation of closing stock within financial statements is cost price or market price that is less. Though, in cost accounts, valuation of closing stock might be prepared on the basis of marginal costing in which only the variable costs are taken into concern when valuing the closing stock. So the closing stock valuation might different. Work-in-Progress in cost accounts is frequently valued on the basis of prime cost and occasionally variable manufacturing overheads are added in the same. Alternatively, in financial accounting, work-in-progress might be valued after taking into concern administrative expenses also. Because of this variation in valuation, profits depicted through cost accounts and financial accounts different.

Ø   Abnormal Losses and Gains:

In cost accounts, abnormal losses and gains are calculated and transferred to the Costing Profit and Loss A/c. No such type of computation is made in the financial accounts. This results in variation among the profits depicted by cost accounts and financial accounts.

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