Cost and Management Accounting · Process & Operation Costing

Inter-Process Profits (Process and Operation Costing)

Updated 4 October 2026 · Fact-checked

Inter-process profit is the profit a process adds when it transfers output to the next process at a price above cost. Stock held in later processes or finished goods carries part of this profit, which is unrealised. Remove it with a provision, then report cost-based profit.

Understand Inter-Process Profits

In normal process costing, output moves from one process to the next at cost. Sometimes a firm treats each process like a profit centre. Then it transfers output at cost plus a profit margin. The margin may be a percentage on cost or a percentage on transfer price.

Each process account now shows a profit. The next process receives the goods at the transfer price, not at true cost. So its costs and its closing stock are inflated by the earlier process's profit.

This profit is realised only when the goods are sold outside the firm. Goods still lying in later-process stock or in finished stock carry unrealised profit. You cannot show it as earned. It must be removed with a provision for unrealised profit (also called stock reserve).

The provision is charged to the profit and loss account. Next year, the opening provision is reversed. So only the change in the provision hits profit each year. After this adjustment you get the cost-based profit, which is what the firm really earned.

The key point: only the portion of stock that came from the earlier process at transfer price carries that process's profit. Costs added in the current process carry no inter-process profit.

Key rules to remember

Transfer price (profit on cost): Transfer price = Cost × (1 + profit % on cost); Example: 25% on cost means transfer price = 125% of cost.
Transfer price (profit on transfer price): Transfer price = Cost ÷ (1 − profit % on transfer price); 25% on transfer price means cost is 75% of transfer price, so profit = 1/3 of cost.
Profit in the transfer: Profit = Transfer price − Cost; This is the profit shown in the transferring process account.
Unrealised profit in stock: Unrealised profit = Stock value at transfer price (transferred-in portion) × Profit ÷ Transfer price; For 25% on cost, the fraction is 25/125 = 20% of transfer price. Apply only to the transferred-in portion.
Adjustment in provision: Adjustment = Closing provision − Opening provision; An increase reduces profit. A decrease adds to profit.
Cost-based profit: Cost-based profit = Profit as per books − Increase in provision (or + decrease); This is the real profit of the firm.

How to solve Inter-Process Profits questions

Use this order for any inter-process profit question. It keeps the book entries and the profit adjustment separate.

1Write down each transfer basis. Convert it to a profit fraction of transfer price (20% for 25% on cost, 25% for 25% on transfer price).
2Prepare each process account. Take the transfer-in at transfer price, add the process's own costs, and credit the transfer-out at transfer price. The balancing figure is the process profit.
3Find the closing stock position: how many units or how much value is in each later process and in finished stock.
4Split each stock value into the transferred-in portion (at transfer price) and the portion added by the current process. Only the transferred-in portion carries profit.
5Compute unrealised profit on the transferred-in portion. If the goods passed through several processes, add the profit of each earlier process.
6Compute the closing provision. Subtract the opening provision, if any, to get the adjustment.
7Deduct the increase (or add the decrease) from the book profit to get cost-based profit.
8Check: recompute profit using true cost per unit. It should match.

Quickest way: Profit fraction and true cost check

When to use it: Use this when the question gives stock quantities and asks for the provision or cost-based profit. It works for both MCQs and written answers.

Convert the margin to a fraction of transfer price first. 25% on cost becomes 1/5. 20% on cost becomes 1/6. 25% on transfer price stays 1/4.
Multiply the transferred-in value in closing stock by this fraction. That is the provision. You often do not need to build every account.
For MCQs, you can find cost-based profit by using true cost per unit: Sales − (units sold × true unit cost).
In a written answer, show the process accounts, then a separate working note for the provision. Step marks go to the transfer price, the portion of stock, and the fraction used.
Always show the formula and the final adjustment. If the examiner disagrees with a figure, you still earn the method marks.

Common mistakes in Inter-Process Profits

Taking the provision on the whole closing stock value.
Students forget that costs added in the current process carry no earlier profit.
Fix: Split stock into transferred-in value and own-process cost. Apply the profit fraction only to the transferred-in value.
Using 25% of stock value when the margin is 25% on cost.
The profit is a percentage of cost but stock is valued at transfer price.
Fix: Convert first. Profit on cost of 25% means profit is 25/125 = 20% of transfer price.
Charging the full closing provision to profit every year.
Students ignore the opening provision created in the previous year.
Fix: Charge only the increase over the opening provision. Credit any decrease.
Showing the transfer to the next process at cost in the process account.
Habit from ordinary process costing.
Fix: Credit the transferring process at transfer price. Debit the receiving process with the same transfer price.
Ignoring profit from the first process when stock has passed through several processes.
Students look only at the last transfer.
Fix: Stock in a later process carries the profit loaded at each earlier transfer. Add them, applying each to its own transferred-in portion.
Treating unrealised profit as a loss or an expense of the process.
Confusion about what the provision does.
Fix: It is a reserve adjustment in the profit and loss account or in the memorandum. It does not change the process accounts.

Worked examples

Example 1

Process A produces 10,000 units at a total cost of ₹3,50,000 and transfers all of them to Process B at cost plus 25% on cost. Process B adds further costs of ₹1,12,500 and transfers its entire output of 10,000 units to finished stock at cost to B. During the year 8,000 units are sold at ₹75 each. Find the profit as per books, the unrealised profit in closing stock and the cost-based profit.

Show the solution

Transfer price from A = ₹3,50,000 × 125% = ₹4,37,500. Profit in A = ₹87,500.
Cost in B = ₹4,37,500 + ₹1,12,500 = ₹5,50,000. Cost per unit = ₹55. B transfers to finished stock at ₹5,50,000, so B shows no profit.
Sales = 8,000 × ₹75 = ₹6,00,000. Cost of goods sold = 8,000 × ₹55 = ₹4,40,000. Profit on sales = ₹1,60,000.
Profit as per books = ₹87,500 + ₹1,60,000 = ₹2,47,500.
Closing stock = 2,000 units × ₹55 = ₹1,10,000. The transferred-in portion from A = 2,000 × ₹43.75 = ₹87,500.
Unrealised profit = ₹87,500 × 25/125 = ₹17,500.
Cost-based profit = ₹2,47,500 − ₹17,500 = ₹2,30,000.
Check: true cost per unit = (₹3,50,000 + ₹1,12,500) ÷ 10,000 = ₹46.25. Profit = ₹6,00,000 − 8,000 × ₹46.25 = ₹6,00,000 − ₹3,70,000 = ₹2,30,000.

Answer: Profit as per books ₹2,47,500; unrealised profit in closing stock ₹17,500; cost-based profit ₹2,30,000.

Example 2

Process 1 transfers 3,000 units to Process 2 at cost plus a profit of 25% on transfer price. The cost of these units in Process 1 is ₹72,000. At the year end, Process 2 holds 1,500 units as closing stock. Its value is ₹60,000, which includes ₹12,000 of costs added in Process 2. The opening provision for unrealised profit was ₹6,000. Profit as per books is ₹90,000. Find the provision needed, the adjustment and the cost-based profit.

Show the solution

Transfer price = ₹72,000 ÷ (1 − 0.25) = ₹96,000. Profit = ₹24,000. Transfer price per unit = ₹96,000 ÷ 3,000 = ₹32.
Transferred-in portion of closing stock = 1,500 × ₹32 = ₹48,000. This matches ₹60,000 − ₹12,000 = ₹48,000.
Closing provision = ₹48,000 × 25% = ₹12,000. The ₹12,000 of own costs carries no profit.
Adjustment = ₹12,000 − ₹6,000 = ₹6,000 increase.
Cost-based profit = ₹90,000 − ₹6,000 = ₹84,000.

Answer: Closing provision ₹12,000; additional charge to profit ₹6,000; cost-based profit ₹84,000.

Exam tips

Read the margin wording carefully: on cost, on transfer price, or on selling price. Convert it before you start.
In sums with stock in several processes, draw a small table of units or value, source process and profit fraction. It prevents missed profit layers.
Show the provision as a separate working note. It earns marks even if the process accounts have small errors.
Check whether an opening provision exists. Many questions give it to test whether you charge only the difference.
For MCQs, use the true cost per unit method as a quick check. No negative marking means you should always attempt the question.

Practice questions from Process & Operation Costing

Inter-Process Profits in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inter-Process Profits: frequently asked questions

What is unrealised profit in inter-process transfers?

It is the profit loaded on goods transferred between processes that are still unsold. It is not earned until the goods are sold outside the firm. It is removed from profit through a provision.

How do I calculate unrealised profit when the profit is on cost?

Convert the margin to a share of transfer price. For 25% on cost, the profit is 25/125, or 20%, of the transfer price. Multiply this by the transferred-in value of the unsold stock.

Is the provision charged fully every year?

No. Only the change in the provision is charged. If the closing provision is higher than the opening one, the increase reduces profit. If it is lower, the decrease adds to profit.

Does the provision apply to the costs added in the current process?

No. Costs added in the current process are real costs, so they carry no inter-process profit. Only the value brought in from the earlier process at transfer price carries profit.

What is cost-based profit?

It is the profit the firm really earned, after removing the unrealised profit in stock. It equals profit as per books less the increase in the provision for unrealised profit.