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1NTER-PROCESS PRO11TS

Introduction:
While transIerring the outputs oI one process to another, the company might add some
amount oI proIits to it. This is to get the actual cost oI Iinished product as, iI the company
would have bought the inputs Ior the next process, it would be inclusive oI proIits. But, at
the end oI an accounting period, this inter process proIit has to be excluded in order to get
the real valuation oI closing stock.

Inter process proIit is a main aspect in Process costing.

Process costing:
Process costing is that Iorm oI operation costing which is used to ascertain the cost oI the
product at each process or stage oI manuIacture.

Application of process costing :
The industries in which process costs may be used are many. In Iact a process costing
system can usually be devised in all industries except where job, batch or unit operation
costing is necessary.

Examples oI industries, where process costing is applied are:-
1. Chemical works Textile, weaving, spinning, etc.
2. Paper mills Paint, Ink and varnishing, etc.

Advantages of process costing :
The Iollowing are the main advantages oI process costing:
O It is possible to determine process costs periodically at short intervals. Unit cost
can be computed weekly or even daily iI overhead rates are used on
predetermined basis.
O It is simple and less expensive to Iind out the process cost.
O It is possible to have managerial control by evaluating the perIormance oI each
process.
O It is easy to allocate the expenses to processes in order to have accurate cost.
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O It is easy to quote the prices with standardization oI process. Standard costing can
be established easily in process type oI manuIacture.

undamental principles of process costing:
The Iollowing are the Iundamental principles oI process costing:-
O Cost oI materials, wages and overhead expenses are collected Ior each process or
operation in a period.
O dequate records in respect oI output and scrap oI each processor operation
during the period are kept.
O The cost per Iinished output oI each process is obtained by deviating the total cost
incurred during a period by the number oI units produced during the period aIter
taking into consideration the losses and amount realized Irom sale oI scrap.
O The Iinished product along with its cost is transIerred Irom one process to the next
process just like raw materials oI that process.

lements of production costing :
The Iollowing are the main elements oI production cost in process costing:

Materials:
Generally in process costing, all the material required Ior production is issued to the Iirst
process, where aIter processing it is passed to the next process and soon. Some operation
on the material is perIormed in each process which has been passed Irom the Iirst process.

Labour:
Generally, the cost oI direct labour is very small part oI the cost oI production in
industries adopting process costing. The direct labour element becomes smaller and
smaller while the overhead element increases with the introduction oI more and more
automatic machinery.

Production overhead:
The overhead element oI total cost is generally very high in process costing great care is
required to ensure that each process is charged with a reasonable share oI production
overhead. The actual overheads are debited to each process account.
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In process costing, the four main aspects which are to be discussed are:
O Process losses
O Inter process proIits
O Work-in-progress and eIIective or equivalent production.
O oint and by-products.

INT#P#$$ P#IT$:
In some process industries the output oI one process is transIerred to the next process
not at cost but at market value or cost plus a percentage oI proIit. The diIIerence between
cost and the transIer price is known as inter-process proIits. The proIit associated with the
transIer oI goods Irom one process to another process is called Inter Process ProIit.
Normally, Iinished goods are transIerred to the immediate next process at the cost oI
production basis. In some process industries, Iinished goods are transIer to the immediate
next process by including a nominal amount oI proIit. The proIit so incorporated is called
inter-process proIit. The price Iixed by adding the nominal amount oI proIit Ior the
transIer oI Iinished goods to the next process is termed as mark-up price.




The eIIiciency oI process operations can be judged by comparing the value oI output
oI a process with the price which would be paid Ior purchasing material Irom the market.
II the market price is lower, the process operations are clearly not eIIicient. Conversely, iI
the market price is higher, the eIIiciency oI the process operations should be recognized
in terms oI proIits contributed by the process equal to the excess oI market price over its
cost. Naturally, Ior true comparison oI eIIiciency oI, say, process II, the output oI process
I should be transIerred at market price and not at the cost price.
Market price transIer Iormula has an additional advantage in that the Iinal process
account is not artiIicially distorted by inclusion oI a Iigure oI proIit which has, in Iact,
accrued throughout the sequence oI prior process.



TransIer price Cost oI output ProIit

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This profit on closing stock can be calculated with following formula :



bjectives of InterProcess Profit:
The output oI a particular process is transIer to the next process by adding a nominal
amount oI proIit Ior the Iollowing objectives.
O To assess the perIormance oI the process operation.
O To examine whether the output can compete with the market or not.
O To decide whether the output should be sold without Iurther processing or putting
Ior Iurther processing.

The advantages and disadvantages oI using inter-process proIit, in the case oI process
type industries are as Iollows:

Advantages:
1. Comparison between the cost oI output and its market price at the stage oI completion
is
Iacilitated.
2. Each process is made to stand by itselI as to the proIitability.

Disadvantages:
1. The use oI inter-process proIits involves complication.
2. The system shows proIits which are not realized because oI stock not sold out.



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INT# P#$$ P#IT?

1. To show cost oI production in relation to the market price.
2. To make each process stand on its own eIIiciency and economies.
3. To induce competition in diIIerent processes which ultimately leads to cost
control?

Problem:
certain product passes through two processes desired beIore it is transIerred to Iinished
stock. The Iollowing inIormation is obtained Ior the month oI March 2007.
Particulars Process - I Process -II Finished
Stock


Opening stock
Direct Material
Direct Wages
Production Overheads
Closing Stock
ProIit on transIer price
oI the next process...
Inter-process proIits Ior
opening stock
Rs.

7,500
15,000
11,200
10,500
3,700

25

------
Rs.

9,000
15,750
11,250
4,500
4,500

20

1,500

Rs.

22,500



11,250



8,250

Stocks in processes are valued at prime cost and Iinished stock has been valued at the
price at which it was received Irom Process II. Sales during the period were Rs. 1,40,000.
Prepare and compute-----
a) Process account showing proIit element at each stage ;
b) ctual realised proIit ; and
c) Stock valuation Ior balance sheet purposes.



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$olution:
P#$$ I Account

Particulars Total
(#s.)
ost
(#s.)
Profit
(#s.)
Particulars Total
(#s.)
ost
(#s.)
Profit
(#s.)

To opening stock b/d
To materials
To Wages

Less: Closing stock c/d

Prime cost

To Production
overheads

Total Cost

To Gross proIit
(33 1/3 on cost)



To stock b/d



7,500
15,000
11,200
33,700

3,700
30,000


10,500

40,500

13,500


54,000

3,700

7,500
15,000
11,200
33,700

3,700
30,000


10,500

40,500

--------


40,500

3,700

-----
-----
-----
-----

----
----


-------

------

13,500


13,500

-------

By Process
II /c
(TransIer)


54,000





















54,000




40,500





















40,500




13,500





















13,500








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P#$$ II Account

Particulars Total
(#s.)
ost
(#s.)
Profit
(#s.)
Particulars Total
(#s.)
ost
(#s.)
Profit
(#s.)

To opening stock b/d
To process I
/c(transIer)
To materials
To Wages
Total

Less: Closing stock
c/d

Prime cost

Overheads

Total Cost

To Gross proIit
(1/4 oI cost)




To stock b/d


9,000

54,000
15,750
11,250
90,000

4,500

85,500

4,500

90,000

22,500


1,12,500

4,500

7,500

40,500
15,750
11,250
75,000

3,750

71,250

4,500

75,750

--------


75,750

3,750

1,500

13,500
-----
-----
15,000

750

14,250

-------

14,250

22,500


36,750

750

By Finished
stock II /c
(TransIer)


1,12,500
























1,12,500




75,750
























75,750




36,750
























36,750








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INI$D $T Account

Particulars Total
(#s.)
ost
(#s.)
Profit
(#s.)
Particulars Total
(#s.)
ost
(#s.)
Profit
(#s.)

To opening stock b/d
Process II /c

Total

Less: Closing stock
c/d


To Gross ProIit



To Stock b/d



22,500
1,12,500

1,35,000

11,250
1,23,750

16,250

1,40,000

11,250


14,250
75,750

90,000

7,500
82,500

--------

82,500

7,500


8,250
36,750

45,000

3,750
41,250

16,250

41,250

3,750

By Sales

1,40,000













1,40,000



82,500













82,500



57,500













57,500




















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onclusion :

In some process industries the output oI one process is transIerred to the next
process not at cost but at market value or cost plus a percentage oI proIit. The diIIerence
between cost and the transIer price is known as inter-process proIits. The proIit associated
with the transIer oI goods Irom one process to another process is Inter Process ProIit.
Inter process proIit is a main aspect in Process costing.
The main purpose oI Inter-Process proIits is:
1. To show cost oI production in relation to the market price.
2. To make each process stand on its own eIIiciency and economies.
3. To induce competition in diIIerent processes this ultimately leads to cost control.


































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ibliography:

O Book : Cost ccounting by M.Y. Khan and P.K. ain
O Book : Cost and Management ccounting by S.P. ain and K.L. Narang
O www.wikipedia.org
O www.scribd.com
O www.managementparadise.com