# Valuation of Closing Stock on Consignment

#### Stock Valuation Principle [Value = Cost + Direct Expenses]

If you ask someone who has newly constructed a house, its value, what would he/she say? They would recollect the amount they have spent on buying land, registration charges paid, materials for construction, labour payments, etc., add up the same and express that figure (sum) as its value.

Unknowingly, they are going by the basic principle for the valuation of assets - "The Value of an Asset Includes all the expenses incurred before bringing the asset into usable condition". The expenses which go into the value of an asset are called direct expenses.

Even in valuing Stock (in Consignments) the same principle is used.

#### Valuation of Stocks »

The valuation of stock can be classified depending on
• #### When?

The various instances when we will be required to value stocks based on when we do it are
1. Valuation of Closing Stock at the end of the accounting period.
2. Valuation of Stock lost on account of abnormal reasons.
3. Valuation of Stock in transit.
4. Valuation of Stock transferred to other businesses.
5. Valuation of Stock Returned to stores
• #### At What Point?

To value stock we need to first consider the point at which we are valuing it. Based on this criterion stock valuation can be classified as
1. #### Value of Stock while in transit       = Cost of Stock + Consignors Direct Expenses

The cost of the goods/stock implies the value at which the goods are consigned by the consignor to the consignee. The goods being in transit, implies that the consignor expenses on the goods have been incurred.

Therefore, all the expenses on consignment incurred by the consignor would form part of the direct expenses for the stock for the purpose of ascertaining the value of Stock-in-Transit.

2. #### Value of Stock just before being unloaded at the consignees godown       = Cost of Goods + Consignors Direct Expenses + Proportionate Consignee Direct Expenses

The cost of the goods/stock implies the value at which the goods are consigned by the consignor to the consignee. Since the goods have reached the consignees godown, we can consider the consignor expenses on the goods to have been incurred. Moreover any direct expenses incurred by the consignee in relation to the transportation of the goods, octroi duties, insurance in transit etc., would also have to be considered as having been incurred on the goods.

Therefore, the direct expenses incurred till that point would include the consignor expenses and that part of the consignee expenses which relate to the expenses incurred on the stock before being unloaded.

3. #### Value of Stock after being placed in the consignees godown       = Cost of Goods + Consignors Direct Expenses + Proportionate Consignee Direct Expense

The cost of the goods/stock implies the value at which the goods are consigned by the consignor to the consignee. Since the goods have reached the consignees godown and have been unloaded, we can consider the consignor expenses on the goods to have been incurred. Moreover any direct expenses incurred by the consignee in relation to the transportation of the goods, octroi duties, insurance in transit, unloading charges etc., would also have to be considered as having been incurred on the goods.

Therefore, the direct expenses incurred till that point would include the consignor expenses and that part of the consignee expenses which relate to the expenses incurred till they are unloaded.

#### Statement for Valuation of Stocks

Particulars Quantity
(in units)
Rate
(in Rs/unit)
Amount
(in Rs)
Goods Consigned 1,100 50 55,000
Add: Consignor Direct Expenses 10 11,000

1,100 60 66,000
Less: Stock - in - Transit 100 60 6,000
Goods Collected by the Consignee 1,000 60 60,000
Add: Consignee Direct Expenses 5 5,000

Value of Stock received by the Consignee 1,000 65.00 65,000
Add: Opening Stock with the Consignee 100 62 6,200
Average Value of total stock 1,100 64.73 71,200

Value of Unsold Stock 150 65 9,750.00
Cost of Goods Sold 950 (?) 64.68 61,450.00

#### Note:

1. Normally stocks are valued under FIFO method unless there is a specific instruction to the contrary.
2. #### Stock-in-Transit

The value of stock in transit includes the cost of goods consigned and the proportionate direct expenses incurred by the consignor. The consignee expenses can be assumed to have not been spent on these since they did not reach the consignee.
3. #### Cost of Goods Sold

The value of "Cost of Goods Sold" is not needed. However the value can be obtained as the difference between "Total value of stock with the consignee − Value of Closing Stock" irrespective of the method used for valuing stocks.
4. #### Rate Column

The rate column should always be obtained as the quotient of "Value ÷ Quantity" to avoid error.
5. #### No Opening Stock

In the absence of opening stock all the stocks would be valued at the rate at which the stock is received in the current period i.e. Rs. 65.

#### Methods of Valuation of Stocks

There are three methods for valuing the stocks in the above scenario. Each method takes a distinct unit rate for valuing closing stock.
• #### FIFO Method:

By using the FIFO (First In First Out) method for valuation of stocks, we mean to indicate that the stock with the consignee relating to the previous year will be disposed off first and then only the stock received in the current year is touched. Thereby whatever stock lies with the consignee at the end as closing stock would be from the stock sent in the current period only. Therefore it would be appropriate to value stock at the rate that is relevant to the current period stock.

If this method is employed the closing stock should be valued @ Rs. 65.00 per unit, the rate based on the value of the goods consigned during the current period.

• #### LIFO Method:

By using the LIFO (Last In First Out) method for valuation of stocks, we mean to indicate that the stock with the consignee received during the current period will be disposed off first and then only the stock relating to the previous period is touched. Thereby whatever stock lies with the consignee at the end as closing stock would be from the stock of the previous period only. Therefore it would be appropriate to value stock at the rate that is relevant to the previous period stock.

If this method is employed the closing stock should be valued @ Rs. 62.00 per unit, the rate based on the value of the opening stock on consignment.

There may be cases where the closing stock is in excess of the opening stock with the consignee. In such a case, the stock equivalent of opening stock may be valued at the opening stock price and the rest at the rate relevant to the stock received in the current period.
Alternatively the total stock would be valued at the opening stock rate, irrespective of the quantity in stock.

• #### Average Method:

By using the Average method for valuation of stocks, we mean to indicate that the stock with the consignee relating to the previous year and the stock sent during the current period will be mixed and there is no particular methodology adopted for stock disposal. Thereby whatever stock lies with the consignee at the end as closing stock would be either of the periods. Therefore it would be appropriate to value stock at the average rate.

If this method is employed the closing stock should be valued @ Rs. 64.73 per unit. By average we mean "Weighted average of rates with quantities as weights" and not "Simple average of rates"

• #### Weighted Average Price

This is the average value of the stock with the consignee at the beginning of the current period, as well as the stock consigned during the current period. This is also called the "weighted average" of the stock rates taking the quantity of stocks as the weights.
[{(65 × 1000) + (62 × 100)} ÷ (1000 + 100) = {(65,000) + (6,200)} ÷ (1,100)]
• #### Simple Average

The simple average of stock rates is given by the average of the prices Rs. 65 and Rs. 62
[(65 + 62) ÷ 2 = Rs. 63.50.]

#### Note:

Where there is no opening stock or where the rate relevant to opening stock is not known, all the three methods would leave the same rate to be considered i.e. Rs. 65
 Author Credit : The Edifier ... Continued Page 15