Reasons for Disagreement in Profit between Cost and Financial Accounts

The profit shown by Cost Accounts and Financial Accounts may differ due to several reasons:

1. Items shown only in Financial Accounts

These items are recorded in financial accounts but not considered in cost accounts, e.g.:

  • Purely financial incomes: Interest received, Dividend received, Rent received, Profit on sale of assets, etc.

  • Purely financial expenses: Loss on sale of assets, Interest on loans/debentures, Goodwill written off, Preliminary expenses written off, Income tax, Donations, etc.

2. Items shown only in Cost Accounts

Certain notional costs are considered only in cost accounts for decision-making, e.g.:

  • Notional rent of own building.

  • Notional interest on capital employed.

  • Depreciation charged at a higher/different rate in cost books.

3. Difference in Overheads Charged

  • In cost accounts, overheads are absorbed based on predetermined rates (machine hour, labour hour, % of wages, etc.).

  • In financial accounts, actual overheads incurred are recorded.
    👉 This leads to over-absorption or under-absorption of overheads in cost accounts.

4. Difference in Stock Valuation

  • Materials, WIP, or Finished Goods may be valued differently in cost and financial accounts.

    • Cost Accounts → valued at cost (may exclude some expenses).

    • Financial Accounts → valued at cost or market price (whichever is lower).

5. Difference in Depreciation Methods

  • Cost Accounts may use machine-hour method, while financial accounts may use straight-line or written-down value method.

6. Abnormal Gains and Losses

  • Items like abnormal loss of material, abnormal idle time, strikes, accidents, flood losses, etc., are charged in financial accounts but usually excluded from cost accounts.

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