Valuation of Unsold Stock Or Closing Stock in Consignment Accounting:
How is the closing stock or unsold stock laying with the consignee valued?.
The valuation of stock laying with the consignee at the time of final closing of the account of the consignor is generally made at cost or market price whichever is less. The meaning of cost, however, should be properly understood. Cost should not mean merely the cost at which the consignor invoices the goods. If such expenses as normally increase the value of goods have been incurred, a proportionate of such expenses should be included in the cost. In other words, all the expenses incurred to move the goods from the consignor’s premises to the premises of consignee should be included. Expenses which are incurred up to the moment the goods are received into the godown of the consignee are treated as part of the cost. But expenses incurred after the goods have been put into the godown should not be included into the cost because such expenses do not increase the value of goods. Examples of such expenses are godown rent, insurance godown, advertisement, salaries of salesmen, etc. It does not matter who pays the expenses (consignor or consignee).
Suppose, 1000 units are dispatched at a cost of $20 each. The consignor pay $100 for insurance in transit and $200 for packing. The consignee pays 700 for freight, $100 as octroi duty and $100 as cartage. He also pays $200 as godown rent and $150 as insurance premium. The last two items will be excluded while calculating the cost. The total cost will be $20,000 + $100 + 200 + 700 + $100 + $100 = $21,200. The cost per unit, therefore, comes to $21.20. If 100 units remain unsold, the value of stock will be: 100 × 21.20, i.e., $2,300. If the market price is less than this figure, then the value of stock will be on the basis of market price.