Inter process profit arises, when output of one process is transferred to another process at which price ? 

The correct answer is - Cost plus profit price

Key Points

• Inter process profit
  • It arises when the output of one process is transferred to another process at a price higher than the cost price.
  • This transfer price includes the cost of production plus a certain profit margin.
• Cost plus profit price
  • This is the price at which the output of one process is transferred to another process.
  • It ensures that the transferring process makes a profit, which is reflected in the overall profitability of the company.

Additional Information

• Transfer Pricing
  • It is a method used to set the price for goods and services sold between controlled or related legal entities within an enterprise.
  • The main objective is to ensure that transactions between divisions of the same company are conducted as if they were between independent entities.
• Types of Transfer Prices
  • Cost-Based Transfer Prices
    • These are set based on the cost of production plus a markup or profit margin.
    • Ensures that the transferring division covers its costs and earns a profit.
  • Market-Based Transfer Prices
    • Prices are set based on current market prices for the same goods or services.
    • It reflects the opportunity cost of selling internally versus externally.