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Inter Process Profits

Sometimes it is considered desirably by a manufacturing concern to value goods processed by each process at a price corresponding to the market price of comparable goods. Thus, profit or loss made by each process is revealed and the efficiency of one process is not affected by the efficiency or inefficiency of a previous process. The market price of the goods processed being generally higher than the cost to the process, each process account will show some profit. This profit is termed as inter-process profit. The system of accounting for inter-process profits has the following advantages:

1. It is very helpful for those businesses where there is a possibility of getting certain process performed outside the factory. If the market price of similar processed goods is less than the cost of manufacturing the goods in the factory, it will be beneficial for the business to buy partly processed materials rather than carrying the processing work internally.

2. The efficiency and economy of each process can be judged independently as the economies effected one process due to its efficiency are not transferred to the next process.

Adjustments for inter-process profits

It is a sound financial principle that stock for balance sheet purposes should be valued at cost or market price whichever less is. Cost here means ‘Cost’ to the business as a whole. Thus, it is necessary to eliminate the inter-process profits included in the value of inventory in each process and the stock of finished goods at the end of the accounting period. A business cannot earn profit by trading with itself and, therefore, suitable adjustments are made in the value of closing inventory of each process and stock of finished goods by creating a Stock Reserve for an appropriate amount. Besides that value of stock of inventories fluctuates from year to year and, therefore, the Stock Reserve will have to be increased or decreased according to the circumstances.