INTER PROCESS PROFITS

Dr. Avijit Roychoudhury

Inspector of Colleges
Vidyasagar University
Inter-Process Profit
The profit associated with the transfer of goods from one process to another process
is called inter-process profit. Normally, finished goods are transferred to the
immediate next process at the cost of production basis. In some process industries,
finished goods are transfer to the immediate next process by including a nominal
amount of profit. The profit so incorporated is called inter-process profit. The price
fixed by adding the nominal amount of profit for the transfer of finished goods to the
next process is known as transfer price. Adding profit on the goods transferred is
termed as mark-up price.
Transfer Price = Cost of output+ Profit
Most of production is done in various stages, or consecutive processess, where the
output of first process becomes input for the next process. For example, in steel
industries, iron ore is processed to produce sponge iron or billets which is
subsequently given various shapes as per requirement.
The billets thus produced becomes input for the machines that give final shape to the
metal. The cost incurred to produce billets is passed on to the next process as per
actuals. As the material passes through various production processes, the cost
accumulates and we get final Total Cost of Production.
However, there can be a variation. The cost of output passed on to the next process
need not be as per actuals. The billets can also be sold in open market where profit
margin is added to cost. If the organisation decides to make each process independent
profit centres, it can add an element of profit to the cost and then transfer to the next
process. This, in reality, inflates the actual cost of production. This element of
notional profit added to cost is called Inter-Process profit. The effect of this profit
must be removed while determining the final cost of production.
Objectives Of Inter-Process Profit
The output of a particular process is transfer to the next process by adding a nominal
amount of profit for the following objectives:
 To assess the performance of the process operation.
 To examine whether the output can compete with the market or not.
 To decide whether the output should be sold without further processing or
putting for further processing.
 Comparison of costs with market price at each stage assist management to
take ‘make or buy’ decisions.
Adjustment for Inter Process Profits:
When the output of one process is transferred to another and finally to finished stock
account at transfer price (cost plus estimated profit margin), the closing inventories if
any will be valued at transfer price. Such inventories will include unrealized profits.
Such profits should be adjusted for purposes of year-end financial reporting.
Otherwise, it will amount to earning profit by trading within the organization. Hence,
necessary adjustments are made in the values of closing inventories by means of
creating reserves or provision for unrealized profits. Total profit less provision for
unrealized profits would amount to profits earned on sale of finished stock. The closing
inventories will be shown in the balance sheet at cost i.e., values of inventory at
transfer price less provision for unrealized profits.
Computation of provision for unrealized profits:
Formula Cost of inventory = cost/total x Closing inventory
Provision for unrealized profits = Value of closing inventory – Cost
Illustration 1:
A product passes through two processes A and B. Output of A is transferred to B
at cost plus 25% profit and from B to finished stock at cost plus 25% profit. There
were no work in progress in both processes and opening stock of finished goods at
the end of the period.
Additional information available is as follows:

Closing stock of finished goods was valued at Rs.45,000 and the balance was
sold for Rs. 1,50,000.
Prepare Process Accounts and Finished Stock Account.
Solution:
Process A A/c
Working Notes:
Illustration 2:
From the following information prepare Process Accounts and calculate the actual
profits earned by a company for the month of January 2003:

Stocks in process are valued at prime cost and finished stock has been valued
at price at which it received from Process C. Sales during the period were Rs.
1,40,000.
Solution:
Process A Account
Opening Reserve will be treated as realized profit and therefore added to
process profits. Closing reserve will be treated as unrealized profit and
therefore deducted from the process profits.
Illustration 3:
There are two processes in a factory manufacturing a single product.
Following are the particulars of expenses incurred in different processes:

After crediting the Process I with Rs. 5,000 being the estimated realizable
value of waste and by-product and Rs.8,000 against process profits the balance
is transferred to process II. There is no wastage of by-product in Process II and
the output is transferred to Finished Stock Account with a margin of 25% on
total cost. The Finished Stock inventories at the end of period showed a
balance of Rs. 21,000.
Prepare Process Accounts and show what figure should be adopted for Balance
Sheet purpose?
Solution: