CMA Intermediate · Cost Accounting · Process Costing
In process costing, when one process transfers output to the next at a price above its cost, what does the term 'inter-process profit' refer to?
Inter-process profit is the margin added by one process to its transfer price that remains inside the stock of the next process. Because the goods have not yet been sold outside, this profit is unrealised and must be eliminated through a reserve against stock.
- AThe profit earned on finished goods sold to customers in the final process
- BThe excess of transfer price over cost that is still included in the stock of the receiving process and has to be treated as unrealisedCorrect
- CThe normal loss recovered from sale of scrap between two processes
- DThe difference between budgeted and actual output of a process
Explanation
When a process transfers at cost plus a margin, any units still unsold or unconsumed in the later process carry the transferring process's profit in their value. That portion is unrealised, so a provision or reserve is created to remove it from stock valuation. Profit on goods sold to customers and scrap recoveries are different concepts.
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