Page 33 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes (c) Dividend and interest received on investments
(d) Profits on the sale of fixed assets
(e) Interest received on bank deposits
(f) Income tax refund

(g) Commission received
(h) Cash discount received
(i) Brokerage received
(j) Damages received.

(iii) Appropriations of Profit: Under this category, the following items are included:
(a) Donations and charities
(b) Income tax
(c) Dividend paid

(d) Transfers to reserves and sinking funds
(e) Any other items which appear in profit and loss appropriation account.
2. Items Shown Only in Cost Accounts: There are certain items which are included in cost
accounts but not in financial accounts.

Examples:

(a) Nation depreciation on assets fully depreciated in the books
(b) National rent of the owned building and no rent is payable
(c) Interest on capital employed but not actually paid
(d) National salaries

3. Over or Under-absorption of Overheads: Overheads absorbed in cost accounts on the
basis of estimation like percentage on direct materials, percentage on direct wages, etc.
may be more or less than the actual amount incurred. If overheads are not fully absorbed,
i.e. the amount in cost accounts is less than the actual amount, the shortfall is called
under-absorption. On the other hand, if overhead expenses in cost accounts are more than
the actual, it is called over-absorption. Thus, under or over-absorption of overheads leads
to difference in two accounts. Sometimes, selling and distribution expenses are ignored in
cost accounts and as such costing profit will be higher and thus requires reconciliation.
4. Different Bases of Stock Valuation: In cost accounting, stock are valued according to the
method adopted in stores accounts i.e., FIFO, LIFO, etc. On the other hand, valuation of
stock in financial accounts is invariably based on the cost or market price, whichever is
less. Different stock values result in some difference in profit or loss shown by the two sets
of account books.

5. Different Bases for Depreciation: In cost accounts, the assets may be depreciated on the
straight line method, whereas in financial accounts, a different method of depreciation
such as reducing balance method or sinking policy method or a different method is
followed. The difference in the method of depreciation followed in these systems of
accounts results in a difference of profit.

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