How to approach it
- Reconciliation: start from one profit (usually cost) and list every item treated differently in the other set of books.
- For each item ask: does it make financial profit higher or lower than cost profit? Add or deduct accordingly.
- Typical differences: under/over-absorbed overheads, different inventory valuations, purely financial income and expenses, notional costs charged only in cost accounts.
- Service costing: build the annual operating quantity first (vehicles × trips × distance × occupancy × days), then total cost per period, then cost per unit and the fare with the required margin.
Key rules to apply
- Over-absorption in cost accounts means cost profit is understated relative to actual: add it to reach financial profit (and deduct under-absorption).
- Items appearing only in financial accounts (dividends received, interest on investments, losses on sale of assets, preliminary expenses) are adjusted in full.
- Notional charges (interest on capital, notional rent) appear only in cost accounts: add them back to reach financial profit.
- Passenger-km = distance × passengers carried; check whether the question gives occupancy as a percentage of seats.
Answer layout
| Reconciliation statement | ₹ |
|---|---|
| Profit as per cost accounts | |
| Add: items increasing financial profit | |
| Less: items reducing financial profit | |
| Profit as per financial accounts |
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Adding and deducting the same item the wrong way round; write 'financial higher or lower?' beside each item.
- Reconciling stock differences on opening and closing stock in the same direction (they work in opposite directions).
- Service costing: forgetting idle days or occupancy when computing the operating quantity.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q3 without copying it.
Original practice question
Reconciling cost and financial profit
A manufacturer's cost accounts show a profit of ₹4,50,000. In the financial accounts: actual factory overheads exceeded the amount absorbed in cost accounts by ₹30,000; closing stock was valued ₹20,000 lower than in cost accounts; dividends received were ₹15,000; preliminary expenses of ₹10,000 were written off. The cost accounts include notional interest on capital of ₹25,000.
Required: Calculate the profit as per financial accounts.
Worked solution
| Item | ₹ |
|---|---|
| Profit as per cost accounts | 4,50,000 |
| Add: dividends received (financial only) | 15,000 |
| Add: notional interest (cost only) | 25,000 |
| Less: under-absorbed factory overheads | (30,000) |
| Less: lower closing stock in financial books | (20,000) |
| Less: preliminary expenses written off | (10,000) |
| Profit as per financial accounts | 4,30,000 |
Answer: ₹4,30,000.