Page 288 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 14.3 Inter Process Profit

The usual practice is to transfer the materials to the next process at cost and from the last process
to the finished stock account also at cost. But sometimes the transfer is made at market price. It
should be noted that merely to add a margin of profit to the cost while transferring the materials
to the next process cannot serve any useful purpose. The transfer should be made at the current
market price. Following are the main objectives of inter process profit:

z z To show whether the cost of production completes with the market price, and
z z To make each process stand on its own efficiency and economies.
If the market price be higher than cost, a process account will reveal profit. Then the stock in the
next process will not be valued at cost. The value of stock will include a margin of profit which is
not proper for balance sheet purposes.

Example: A product passes through three processes A, B and C. The output of process
A and process B is charged to the next process at a price calculated to give a profit of 16% on the
transfer price while the output of process C is charged to the finished stock account as a profit of
13% on the transfer price.

From the following particulars, prepare the process cost accounts, and calculate the amount of
reserve that should be made in respect of the stock in hand.
process A (`) process B (`) process C (`)
Materials and Direct labour 7,000 2,800 4,800

Closing stock 2,000 2,800 2,000
There were no stocks in hand at the beginning of the period and the question of on cost has been
ignored. The closing stocks are valued at prime cost in each process.

Solution:
Process Account A

Amount Amount
Particulars Particulars
(`) (`)
To Materials and Direct labour 7,000 By Closing stock 2,000
To Profit (20% on cost or 16 2 3 % on 1,000 By process B a/c 6,000
transfer price)
8,000 8,000

Process Account B
Amount Amount
Particulars Particulars
(`) (`)
To process A a/c 6,000 By Closing stock 2,800
To Materials and Direct labour 2,800 By process C a/c 7,200
To Profit (20% on cost or 16 2 3 % on 1,200
transfer price)
10,000 10,000

282 LOVELY PROFESSIONAL UNIVERSITY