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CMA Intermediate · Cost Accounting · Reconciliation of Costing and Financial Profit

Which of the following is a reason why profit as per cost accounts differs from profit as per financial accounts because of a NOTIONAL item?

Interest on capital charged in cost accounts only is a notional item. It is included in costs to reflect the opportunity cost of owned funds but involves no actual payment, so financial accounts omit it. The other options are actual financial items excluded from cost accounts.

  1. AInterest on capital charged in cost accounts onlyCorrect
  2. BGoodwill written off in financial accounts only
  3. CDonations paid, shown in financial accounts only
  4. DProfit on sale of investments in financial accounts only

Explanation

Notional items such as interest on own capital or notional rent are charged in cost accounts to reflect the cost of using resources, but no actual payment is made, so they do not appear in financial accounts. Goodwill write-off and donations are financial charges, and profit on investments is a financial income; none of these is notional.

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