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Hi everyon,
I’m a bit confused with the calculation of provision for unrealised profit (PUP).
Say a profit margin of 25%, and closing intragroup inventories of 100.Sometimes the PUP will be calculated as 100*25% = 25
And sometimes as 100*25/125 = 20
How do we know which calculation is appropriate in a given situation?
Thank you in advance.
Kay
This boils down to the difference between margin and mark-up.Your above example says margin.If total sales are 100 with 25 percent margin then cost will be 75 and therefore 25 unrealised from point of view of the group.If on other hand 25 per cent mark-up on cost then profit unrealised is 20 since cost = 100/1.25=80.This can be shown by 80 x 1.25=100.Hope this helps.
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