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CA Intermediate · Cost and Management Accounting · Cost Accounting Systems

Sundaram Industries, in its cost books, shows the following for a year: Opening stock of finished goods Rs 1,20,000; cost of production Rs 9,00,000; closing stock of finished goods Rs 1,50,000; administration overheads Rs 60,000 and selling overheads Rs 40,000 (both charged to cost P&L on actual); sales Rs 11,50,000. The financial books show sales Rs 11,50,000 and the closing stock valued at Rs 1,35,000 (opening stock same as in cost books). Administration overhead in financial books is Rs 60,000 and selling overhead Rs 40,000. Other items are identical. What is the difference between profit as per cost books and as per financial books?

Cost profit exceeds financial profit by Rs 15,000. Cost profit is Rs 1,80,000 and financial profit Rs 1,65,000, because closing stock is valued at Rs 1,50,000 in cost books but Rs 1,35,000 in financial books. The higher closing stock lowers cost of goods sold and raises profit in the cost books.

  1. ARs 15,000, with cost profit higherCorrect
  2. BRs 15,000, with financial profit higher
  3. CRs 30,000, with cost profit higher
  4. DNil

Explanation

Cost COGS = 1,20,000 + 9,00,000 − 1,50,000 = 8,70,000. Cost profit = 11,50,000 − 8,70,000 − 1,00,000 = 1,80,000. Financial COGS = 1,20,000 + 9,00,000 − 1,35,000 = 8,85,000, so profit = 1,65,000. Difference is Rs 15,000, with cost profit higher because closing stock is valued higher in cost books.

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