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# 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

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# Difficulties Encountered in Process Costing Procedures:

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.