Calculation of Consignment Stock Value under Cost price and Invoice price

Consignment accounting is unique because the consignor sends goods to the consignee for sale but retains ownership until the goods are sold. Therefore, determining the value of unsold stock (consignment stock) is a critical aspect of consignment transactions. Consignment stock can be valued either at cost price or invoice price, depending on the approach chosen.

Consignment Stock Valuation under Cost Price:

In this method, consignment stock is valued at the cost at which the goods were originally purchased by the consignor. It excludes any markup, profit margin, or adjustments. The cost price reflects the true cost incurred by the consignor to acquire the goods before they were shipped to the consignee.

Steps for Valuing Consignment Stock at Cost Price:

1. Identify the Cost Price:

The cost price is the price at which the consignor acquired the goods from suppliers. It includes direct costs like purchase price, transportation, and other expenses related to bringing the goods to the consignor’s warehouse.

2. Determine the Quantity of Unsold Stock:

Calculate the number of goods that remain unsold at the consignee’s end at the end of the accounting period. This could be determined through inventory checks or sales records.

3. Exclude Expenses Paid by the Consignor:

For the purpose of stock valuation, only the purchase-related costs are considered. Expenses such as advertising, marketing, and other selling costs are not included in the calculation of stock value.

Formula:

Stock Value at Cost = Unsold Quantity × Cost Price per Unit

This simple formula helps the consignor determine the total value of unsold stock based on the cost incurred.

Example:

Let’s say the consignor sent 1,000 units of goods to the consignee at a cost price of $50 per unit. By the end of the accounting period, 200 units remain unsold. The consignment stock value at cost price will be:

Stock Value at Cost = 200 × 50 = 10,000

Therefore, the consignment stock value is $10,000.

Consignment Stock Valuation under Invoice Price:

The invoice price is the price at which the consignor sends the goods to the consignee. This price is often marked up to include the consignor’s expected profit margin. Valuing the consignment stock at the invoice price can provide a higher valuation, but it includes an element of profit that hasn’t yet been realized, as the goods are still unsold.

Steps for Valuing Consignment Stock at Invoice Price:

1. Identify the Invoice Price:

The invoice price is the price at which the consignor has invoiced the consignee, typically including the consignor’s profit margin or markup.

2. Determine the Quantity of Unsold Stock:

Calculate the remaining unsold stock as of the reporting date, using the same methods as in the cost price approach.

3. Adjustment for Unrealized Profit:

Since the invoice price includes profit that hasn’t been realized, it’s necessary to make an adjustment for unrealized profit to arrive at the cost-based valuation of the unsold stock.

Formula:

Stock Value at Invoice Price = Unsold Quantity × Invoice Price per Unit

If adjustments are to be made to remove the unrealized profit, the calculation becomes:

Stock Value at Invoice Price (Adjusted) = Stock Value at Invoice Price − Unrealized Profit

Example:

Assume the consignor sent 1,000 units to the consignee at an invoice price of $70 per unit, and 200 units remain unsold by the end of the accounting period. The consignment stock value at invoice price will be:

Stock Value at Invoice Price = 200 × 70 = 14,000

In this case, the consignment stock is valued at $14,000, which includes an element of profit.

Adjustment for Unrealized Profit:

If the consignor’s profit margin on the invoice price is 20%, the unrealized profit can be calculated as:

Unrealized Profit = 200 × (70 × 0.20) = 2,800

Thus, the consignment stock value adjusted for unrealized profit would be:

Stock Value (Adjusted) = 14,000 − 2,800 = 11,200

Therefore, after removing the unrealized profit, the consignment stock value is $11,200.

Comparison of Cost Price and Invoice Price Method:

• Cost Price:

Reflects the actual cost incurred by the consignor, providing a conservative valuation of unsold stock. It does not consider any potential profit margins.

• Invoice Price:

This method provides a higher valuation since it includes the consignor’s profit margin. However, this may inflate the value of stock unless adjustments are made for unrealized profit.

• Adjusted Invoice Price:

This method removes the unrealized profit from the invoice price to arrive at a more accurate representation of the stock’s value.

Impact on Financial Statements

• Cost Price Method:

When the consignment stock is valued at cost price, it provides a realistic and conservative approach, especially in cases where the goods might not sell at the expected price. It helps the consignor avoid overestimating their assets.

• Invoice Price Method:

This can inflate the value of unsold stock and might lead to an overstatement of assets. However, if the market for the goods is stable, this approach can give a forward-looking view of potential revenue. Adjusting for unrealized profit is necessary to prevent distortion in financial reporting.