Inter Departmental Transfers at Cost Price

1. Transfer from One Department to another Department at Cost Price, i.e., Cost Based Transfer Price:

Under the circumstance, the supplying department should be credited at–cost and the receiving department should be debited at cost, i.e., by the same amount. The so-called cost price may be considered as actual cost or standard cost or marginal cost and, accordingly, transfer price is based on any of the above methods.

2. Transfer from One Department to another Department at Invoice Price/Provision for Un-realised Profit Market Based Transfer Price:

In this case, the Departmental Trading Account of the receiving department is debited and the issuing one credited. Now, if the entire goods of the receiving department is sold within the year, practically no problem arises since notional profit materializes into actuality. But problem arises in the cases where there is unsold stock (i.e., if the entire goods are not disposed off).

In this case, appropriate adjustment for the unsold stock is to be made in order to ascertain the correct profit or loss since the notional profit remains un-realised. (The method of calculation for provision of un-realised profit is simple in the case of a trading concern but the same is very complicated in the case of a manufacturing concern particularly when the latter is engaged in various continuous processes.)

Therefore, provision for both opening and closing stock is to be made. The former is credited and the latter is debited in Consolidated Profit and Loss Account. Alternatively, the net effect can be given to Consolidated Profit and Loss Account.

(i) For Opening Stock Reserve:

Opening Stock Reserve, A/c Dr.

To, General Price

(ii) For Closing Stock Reserve:

General P & L A/c Dr.