The goods transferred by one department to another department is called inter-departmental transfers. The rule applies to inter-departmental transfers is:
Debit the Receiver
Credit the Giver
The department sending the goods is debited and the account of receiving department is credited.
Inter-departmental transfers is made on the following basis:
INTER-DEPARTMENTAL TRANSFER AT COST PRICE
The price at which one department supplies goods to another department or when some services are rendered by department to the another department is known as Transfer Price. It refers to the charge made for goods and services sold internally. It may be market price if one is available. The transfer price is adjusted with the following amounts:
- Cash discount
- Selling costs (not in internal transfers)
- Margin of profit
- Standard costs.
Recording inter-departmental transfers helps the management in setting up profit centres, fixing responsibility on departmental managers and eventually, evaluate the performance and efficiency of the concerned departments.
STANDARD COST BASED TRANSFER PRICE
Under this method of pricing the prices may be based on the actual cost or total cost or standard cost or marginal cost. Standard cost is preferred to actual cost as the efficiency of one department is not allowed to pass to another department. When goods are transferred at cost, the fixed cost of supplying department becomes the variable cost of the receiving department.
INTER-DEPARTMENTAL TRANSFER AT SALE OR INVOICE PRICE
The goods may also be transferred from one department to another at sale or invoice price. The department which transfers the goods is known as Transferor department and the department to which goods are transferred is known as Transferee department. In this case, the transferor department retains the normal profit and does not allow the transferee department to increase its profit at the cost of the transferor.
When the goods received are sold out, the load or profit retained by the transferor department becomes the actual profit realized.
But if the goods remain unsold, then there will be unrealized profit in the closing stock. Unrealized profit is the difference between transfer price and the cost price of unsold stock. These reserves are created as follows:
FOR CLOSING STOCK
| General Profit and Loss A/c Dr.|
To stock reserve A/c
AT THE BEGINNING OF THE YEAR
| Stock reserve A/c Dr.|
To General profit and loss A/c