Inter-process costing refers to the allocation and apportionment of costs between different departments or processes within an organization. It involves determining the cost incurred in one process or department and transferring it to another process or department for further processing. The primary purpose of inter-process costing is to accurately measure the cost of each process or department and determine the profitability of each process or department.
Profit ascertainment, on the other hand, involves determining the profit earned by each process or department within an organization. It aims to calculate the net profit generated by individual processes or departments after accounting for the costs incurred in the production process. Profit ascertainment helps in evaluating the financial performance of each process or department and making informed decisions regarding resource allocation and process improvement.
Allocation of Costs
Inter-process costing involves allocating costs from one process or department to another based on a predetermined basis, such as direct labor hours, machine hours, or square footage. The allocated costs are added to the cost of the receiving process or department to determine the total cost incurred.
Apportionment of Costs
After the costs are allocated, the remaining costs in a particular process or department are apportioned among various cost centers within that process or department. This ensures that the costs are distributed fairly and accurately based on the utilization of resources.
Determination of Process Profitability
By applying inter-process costing, the costs incurred in each process or department are accurately determined. These costs can then be compared to the revenue generated by the process or department to calculate the process profitability. The revenue can be obtained through sales made internally or externally from the process or department.
Evaluation of Process Efficiency
Inter-process costing allows for a detailed analysis of the costs incurred in each process or department, enabling management to assess the efficiency and effectiveness of the production processes. By comparing the costs with the revenue and evaluating the profitability, management can identify areas of improvement and take corrective actions to optimize the utilization of resources and enhance profitability.
Decision Making and Resource Allocation
Profit ascertainment provides valuable information for decision making and resource allocation. By understanding the profitability of each process or department, management can make informed decisions regarding investment in process improvement, allocation of resources, pricing strategies, and product mix. It helps in identifying the most profitable processes or departments and directing resources towards them to maximize overall profitability.
Differences between Inter Process Costing and Profit Ascertainment
| Aspect | Inter Process Costing | Profit Ascertainment |
| Purpose | Allocate and apportion costs between departments | Determine profitability of processes/departments |
| Cost Allocation | Allocates costs from one process to another | Calculates costs incurred in each process |
| Cost Apportionment | Distributes costs within a process or department | – |
| Cost Measurement | Measures the cost incurred in each process | – |
| Revenue Measurement | – | Measures revenue generated by each process |
| Profit Calculation | – | Calculates net profit after accounting for costs |
| Efficiency Assessment | – | Evaluates efficiency of production processes |
| Decision Making | Helps in resource allocation and process improvement | Informs decision making based on profitability |