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Home Accounting For Consignment/Consignment Accounts Valuation of Unsold Stock Or Closing Stock in Consignment Accounting
 

Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting:

Learning Objectives:

  1. How are the normal and abnormal losses are calculated and treated in consignment accounting?

Normal Loss:

Normal loss of goods should also be considered while valuing the closing stock or unsold stock. Normal loss means inherent and unavoidable loss. For example if a certain quantity of coal is consigned, some of it is bound to be lost because of loading and unloading and because of some of it turning into dust. In the nature of coal shortage is unavoidable.

Example:

Suppose 100 tons of coal are despatched. The cost of one ton of coal is $20 and the freight incurred is $470. To the consignor the total cost is $2,470. Suppose, the consignee receives only 95 tones. In that case the consignor can say that the cost of one ton of coal is $2,470/95 or $26. If 20 tons of coal are left unsold with the consignee, the value of stock will be $20 $26 = $520.

Abnormal Loss:

Some losses are accidental or may arise out of carelessness. For example, theft of goods or destruction of goods by fire. Such losses are more or less abnormal and in any case, do not occur often. Suppose part of the goods stolen. This will reduce the value of stock and, therefore, the profit on consignment. In order to see the effect of theft clearly, it is better to find out the value of the goods thus lost. After finding out the value, the consignment account is credited and profit and loss account is debited. The effect of this will be that the consignment account will show its proper profit and in the profit and loss account this profit will be reduced to show actual profit. If part of the loss is recoverable from an insurance company, the amount which can be recovered should be deducted from the loss for the purpose of debiting the profit and loss account. The amount of the loss should be calculated like stock on consignment.

Example/Problem of Abnormal Loss:

1,000 Motors were consigned by A & Co., of Lahore to Bashir of Karachi at an invoice cost of $150 each. A & Co., paid freight $10,000 and insurance $1,500. During transit 100 motors were completely destroyed. Bashir took delivery of the remaining motors and paid $14,400 as duty.

Bashir sent a bank draft to A & Co., for $50,000 as an advance payment and later sent an account sale showing that 800 motors were sold at $220 each. Expenses incurred by Bashir on godown rent and advertisement etc., amounted to $2,000. Bashir is entitled to commission of 5 per cent.

Required: Prepare consignment account and Bashir's account in the books of A & Co., assuming that nothing has been recovered from the insurance company due to defect in the policy.

Consignment to Karachi Account

  $   $
To Goods sent on consignment 1,50,000 By sales (800 220) 1,76,000
To Bank - freight and insurance 11,500 By Profit and loss account - Ab. Loss* 16,150
To Bashir - duty 14,400 By Stock on consignment** 17,750
To Bashir - expenses 2,000    
To Bashir - commission 8,800    
To Profit and loss account 23,200    
 
 
  2,09,900   2,09,900
 
 

Bashir

  $   $
To Consignment account 1,76,000 By Bank 50,000
    By Consignment account  
              Duty 14,400  
              Expenses 2,000  
     
16,400
    By Consignment account-commission 8,800
    By Balance c/d 1,00,800
 
 
  1,76,000   1,76,000
 
 

Working Note:

(1)

*Calculation of abnormal loss:  
  100 motors at $150 each $15,000
  Add 100/1000 of freight and insurance (11,500 100/1000) 1,150
   
  Abnormal loss 16,150
   

(2)

**Calculation of Closing Stock:  
  100 motors at $150 each $15,000
  Add 100/1000 of freight and insurance (11,500 100/1000) 1,150
  100/900 of duty 1,600
   
  Closing stock or unsold stock 17,750
   

You may also be interested in other articles from "accounting for consignment" chapter:

  1. Definition and Explanation of Consignment
  2. Distinction/Difference Between Consignment and Sale
  3. Definitions of Important Terms Used in Consignment Accounting
  4. Consignment Accounting Journal Entries
  5. Valuation of Unsold Stock Or Closing Stock in Consignment Accounting
  6. Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting
  7. Invoicing Goods Higher Than Cost in Consignment
  8. Consignment Accounting Problems, Exercises and Questions
  9. Consignment Accounting Questions and Answers

 

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Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
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Home Accounting For Consignment/Consignment Accounts Valuation and Treatment of Normal and Abnormal Loss in Consignment Accounting

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Difficulties Encountered in Process Costing Procedures:



Learning objectives of this article:

What are the difficulties or Limitations in a process costing procedure?

Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures:

The determination of production quantities and their stage of completion presents problem. Every computation is influenced by these figures. Since the data generally come to the cost department from operating personnel often working under circumstances that make a precise count difficult, a certain amount of double counts and unreliable estimates are bound to exist. Yet, the data submitted from the basis for the determination of inventory costs.

Materials cost computations frequently require careful analysis In the illustrations materials are generally considered to the the cost of first department. In certain industries, materials costs are not even entered on production reports. When materials prices are influenced by fluctuating market quotations, the materials cost may be recorded in a separate report designed to facilitate management decisions in relation to the materials market.

The discussion of lost units by shrinkage, spoilage, or evaporation indicates that the time when the loss occurs influences the final cost calculation. Different assumptions concerning the loss would result in departmental unit costs, which, in turn effect inventory costs, the cost of units transferred, and the completed unit cost. Another consideration involves the possibility of treating cost attributable to avoidable loss as an expense of the current period. Industries using process cost procedures are generally of the multiple product type. Joint processing cost must be allocated the the products resulting from the processes. Weighted unit averages or other bases are used to prorate the joint cost to the several products. If units manufactured are used as a basis for cost allocation, Additional clerical expenses are necessary if the labor hour or machine hour basis is used for charging overhead to work in process. Management must decide whether economy and low operational cost are compatible with increased information based on additional cost computations and procedures.

It should be noted that some companies use both process costing and job order costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required. Each system or method employed by a company must be based on reliable production and performance data which, when combined with output, budget, or standard cost data, will provide the foundation for effective cost control and analysis. 

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Managerial Accounting Articles
 
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
Process Costing System
Process Costing System - Addition of Materials and Beginning Inventory
Controlling and Costing Materials
Materials and Inventory Cost Control
By Products and Joint Products Costing
Cost-Volume-Profit-Relationship
Variable Costing System
Activity Based Costing System
Budgeting and Planning
Standard Costing and Variance Analysis
Gross Profit Analysis
Linear Programming Technique
Segment Reporting and Transfer Pricing
Capital Budgeting Decisions
Service Department Costing
Cash Flow statement
Financial statement Analysis
Pricing Products and Services
Managerial Accounting Terms and Definitions
Managerial / Cost Accounting Formulas
Financial Accounting Articles
Bookkeeping and Bookkeeping Terms
Accounting Principles and Accounting Equation
Journal
Ledger
Accounting For Bills of Exchange
Subdivision of Journal
Final Accounts
Capital and Revenue Items
Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
Accounting for Consignment / Consignment Accounts
Accounting for Joint Ventures
Accounting for Depreciation

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