Skip to content

CA Intermediate · Cost and Management Accounting · Process & Operation Costing

Process I of Rathi Textiles produced goods at a cost of Rs 2,00,000 and transferred all of them to Process II at cost plus 20%, i.e. Rs 2,40,000. At the period end, Process II's closing stock includes Rs 60,000 of material received from Process I, valued at the transfer price. What is the unrealised profit to be eliminated from this closing stock?

The unrealised profit in closing stock is Rs 10,000. Because the transfer price is cost plus 20%, profit forms 20/120 of the transfer price. Applying this to Rs 60,000 gives Rs 10,000. Taking 20% of 60,000 would overstate the profit, since the loading is on cost.

  1. ARs 10,000Correct
  2. BRs 12,000
  3. CRs 50,000
  4. DRs 15,000

Explanation

Transfer price is cost plus 20%, so profit is 20/120 of the transfer price. Unrealised profit = 60,000 x 20/120 = Rs 10,000. Check: cost portion = 50,000, and 20% of 50,000 = 10,000. Rs 12,000 wrongly takes 20% of the transfer price rather than of cost.

Did you get it right without looking?

One question tells you little. A timed set on Process & Operation Costing shows your real accuracy, how long you take and where you lose marks.

Practise Process & Operation CostingFree diagnostic mock

More Process & Operation Costing questions