Cost Accounting · Process Costing

Inter-Process Profit in Process Costing

Updated 10 October 2026 · Fact-checked

Inter-process profit arises when one process transfers output to the next at cost plus a margin. Stock still held at period end contains profit not yet earned by selling outside. To adjust, find the profit element in that stock, create a provision for unrealised profit, and reduce stock and profit by that amount.

Understand Inter-Process Profits

In normal process costing, output moves from one process to the next at cost. Sometimes a firm treats each process as a profit centre. Then the output moves at a transfer price that is above cost, for example cost plus 25%. Each process account then shows a profit.

The problem is that this profit is only on paper. The business has not earned it until the goods are sold to an outsider. If some of the output is still sitting in a later process or in finished goods stock at the year end, that stock is valued at the inflated transfer price. It includes unrealised profit.

Accounting rules do not allow stock to be shown above cost. So you remove the unrealised profit. You do this by creating a provision for unrealised profit. It is charged to the profit and loss account and deducted from stock in the balance sheet. The process accounts stay as they are. The adjustment is made separately.

The profit sits in the part of the stock that came from earlier processes. Cost added by the current process carries no inter-process profit. When goods pass through several processes, the profit builds up. Stock in the last process or in finished goods can then hold profit from every earlier transfer.

In later years you adjust only the change. If last year's closing provision becomes this year's opening provision, you charge or credit just the difference.

Key rules to remember

Transfer price: Transfer price = Cost + Profit; The profit is a given percentage, either on cost or on transfer price. Read the wording carefully.
Profit on cost to profit on transfer price: Profit as % of transfer price = x ÷ (100 + x) when the margin is x% on cost; Example: 25% on cost means 25 ÷ 125 = 20% of transfer price, or 1/5.
Profit on transfer price: Profit = p% × Transfer price when the margin is p% on transfer price; Example: 20% on selling (transfer) price means profit is 1/5 of the transfer price.
Unrealised profit in stock: Unrealised profit = Transferred-in portion of stock (at transfer price) × Profit ÷ Transfer price; Apply it only to the portion that came from the earlier process. Do not apply it to cost added in the current process.
Cumulative unrealised profit: Total unrealised profit in stock = Σ (Profit of each earlier process in the output × Fraction of output held in stock); Use this for multi-process questions where the stock carries profit from several transfers.
Adjustment for the year: Charge to P&L = Closing provision − Opening provision; A positive result reduces profit. A negative result increases profit.
Stock at true cost: Stock at cost = Stock at book value − Provision for unrealised profit; Use this to cross-check your answer.

How to solve Inter-Process Profits questions

Use this method for any question on inter-process profit. Do the working in a clear table so that the examiner can award step marks.

1Read the transfer basis. Note whether the profit is on cost or on transfer price. Convert it to a fraction of transfer price using the formulas above.
2Prepare the process accounts. Show the transfer-in at transfer price, add the process's own costs, and show the profit on transfer to the next process. Total the output.
3Split each process's output into the part sold or transferred on and the part left in stock. Use the units or percentages given.
4For the stock, take only the portion that came from the earlier process at its transfer price. Work out the unrealised profit in it.
5For stock that has passed through more than one process, add the profit from each earlier process. Apply the stock fraction to each profit.
6Total the unrealised profit. Subtract the opening provision, if any. The difference is the adjustment to profit.
7Show the final entries: Stock Reserve (provision) account or a working note, the charge to P&L, and stock at cost in the balance sheet.
8Cross-check. Compute the stock at true cost from the original costs and confirm it equals book value minus the provision.

Quickest way: The 'profit fraction' shortcut

When to use it: Use it when the question gives a fixed margin and a stock fraction, and the examiner only asks for the provision or the adjusted profit.

Convert the margin to a profit fraction of transfer price, such as 1/5 for 25% on cost.
Multiply the transferred-in value of the stock by that fraction. This is the unrealised profit for that stage.
For multi-stage stock, take each stage's total profit in the output and multiply it by the fraction of output held in stock. Add the stages.
Subtract the opening provision and show the difference as the P&L adjustment.
Check with the true-cost method: original cost × stock fraction should equal book value minus provision.

Common mistakes in Inter-Process Profits

Applying 25% on cost directly to the transfer price.
Students see 25% and multiply the transfer price by 25%, without noting that the margin is on cost.
Fix: Convert first. A margin of x% on cost is x ÷ (100 + x) of the transfer price. For 25% on cost, that is 1/5 of transfer price.
Charging the profit fraction on the whole stock value, including the current process's own cost.
Students forget that the current process adds cost at actual cost, not at a marked-up price.
Fix: Split the stock into the transferred-in portion and the portion added in the current process. Apply the fraction only to the transferred-in portion.
Missing profit from earlier processes in multi-stage stock.
Students only compute the profit of the latest transfer.
Fix: Work out the profit in each earlier transfer and add them. Remember that earlier profit is carried into later transfer prices.
Charging the full closing provision to P&L when there is an opening provision.
Students overlook the opening balance.
Fix: Charge only the difference between the closing and the opening provision. Show the opening provision in the working.
Changing the process accounts instead of making a separate adjustment.
Students think the profit in the process accounts must be removed.
Fix: Leave the process accounts as they are. Show the provision in a separate working or a Stock Reserve account and adjust profit and stock there.
Not using the cross-check.
Students run short of time and skip it.
Fix: Spend a minute checking that book value minus the provision equals the stock at original cost. It catches most slips.

Worked examples

Example 1

Process A produces 10,000 units at a cost of ₹2,00,000. They are transferred to Process B at cost plus 25% on cost. Process B adds further cost of ₹1,50,000 and completes all 10,000 units, which pass to finished goods at cost as recorded in Process B. At the year end, 40% of these units remain unsold in finished goods stock. There was no opening stock. Calculate the unrealised profit in the closing stock and the stock value at true cost.

Show the solution

Transfer price from A to B = ₹2,00,000 + 25% of ₹2,00,000 = ₹2,50,000. Profit in A = ₹50,000.
Cost of output in B as recorded = ₹2,50,000 + ₹1,50,000 = ₹4,00,000.
Closing finished stock at book value = 40% of ₹4,00,000 = ₹1,60,000.
Transferred-in portion of that stock = 40% of ₹2,50,000 = ₹1,00,000.
Profit fraction = 25 ÷ 125 = 1/5 (or ₹50,000 ÷ ₹2,50,000). Unrealised profit = ₹1,00,000 × 1/5 = ₹20,000.
Check: true cost of all output = ₹2,00,000 + ₹1,50,000 = ₹3,50,000. 40% of ₹3,50,000 = ₹1,40,000, which equals ₹1,60,000 − ₹20,000.

Answer: Unrealised profit in closing stock = ₹20,000. Charge ₹20,000 to P&L as a provision and show closing stock at ₹1,40,000.

Example 2

Process I output costs ₹80,000 and is transferred to Process II at cost plus 25% on cost. Process II adds ₹60,000 of its own cost, and its output is transferred to Process III at cost plus 25% on the total cost in Process II (including the transferred-in value). Process III adds ₹1,00,000 of its own cost and all output goes to finished goods. Half of the finished goods are unsold at year end. The opening provision for unrealised profit was ₹18,000. Find the unrealised profit in closing stock and the amount to be charged to P&L.

Show the solution

Process I to II: profit = 25% × ₹80,000 = ₹20,000. Transfer price = ₹1,00,000.
Process II total cost = ₹1,00,000 + ₹60,000 = ₹1,60,000.
Process II to III: profit = 25% × ₹1,60,000 = ₹40,000. Transfer price = ₹2,00,000.
Process III total cost = ₹2,00,000 + ₹1,00,000 = ₹3,00,000 (book value of finished goods).
Closing stock at book value = 1/2 × ₹3,00,000 = ₹1,50,000.
Unrealised profit in stock = 1/2 × (₹20,000 + ₹40,000) = ₹30,000.
Check: true cost of all output = ₹80,000 + ₹60,000 + ₹1,00,000 = ₹2,40,000. Half is ₹1,20,000, which equals ₹1,50,000 − ₹30,000.
Adjustment = Closing provision ₹30,000 − Opening provision ₹18,000 = ₹12,000.

Answer: Closing provision = ₹30,000. Additional charge to P&L = ₹12,000. Closing stock at cost = ₹1,20,000.

Exam tips

Read the margin wording twice. 'On cost' and 'on transfer price' give different answers, so convert it before you calculate.
Show a short working note for the unrealised profit. Even if the final number is wrong, the steps earn marks.
Check whether there is an opening provision. Many questions give one so that you must calculate only the adjustment.
In multi-stage questions, list the profit in each transfer in a small table and apply the stock fraction to each line.
For MCQs, use the profit fraction on the transferred-in value and look for the option that matches. Do not add the current process's own cost into the base.

Practice questions from Process 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 inter-process profit in process costing?

It is the profit that one process earns by transferring output to the next at a price above cost. It is shown in the process accounts. It is not realised until the goods are sold outside the business.

How do you calculate unrealised profit in closing stock?

Find the transferred-in part of the stock at transfer price. Multiply it by the profit fraction of the transfer price. If the stock has passed through several processes, add the profit from each earlier transfer.

Why is a provision for unrealised profit created?

Stock must not be shown above cost. The provision reduces both profit and stock by the profit element that has not yet been earned. It is charged to the profit and loss account.

What if there is an opening provision?

Charge or credit only the difference between the closing and the opening provision. If the closing provision is higher, profit falls by the difference. If it is lower, profit rises.