Valuation of stock is taken up in relation to various kinds of stocks in consignment business, such as

1. Closing Stock at the end of the accounting period.
2. Stock lost on account of abnormal reasons.
3. Stock in transit.
4. Stock transferred to other businesses.
5. Stock Returned to stores

Whatever may be the kind of stock being valued, the principle for valuation is the same.

Principle for valuation

The value of stock includes all the expenses incurred before bringing it into usable condition.

Value

= Cost + Direct Expenses

= Cost of stock consigned + Direct Expenses incurred by the Consignor in relation to the stock + Direct Expenses incurred by the Consignee in relation to the stock

Cost

The cost of stock implies the value at which goods are consigned by the consignor to the consignee.

Direct Expenses incurred by the Consignor

All expenses incurred by the consignor would form direct expenses for the stock consigned.

Direct Expenses incurred by the Consignee

Expenses incurred by the consignee which can be relatable to the consigned stock, incurred before placing the goods in the consignee's godown, like cost of transportation, octroi duties, insurance in transit, unloading charges etc., are direct expenses.

A statement in the following format would make the task of valuing stocks easier.

Statement for valuation of stocks

Particulars	Amount (value)	Quantity (in units)	Rate (val/unit)	Amount (value)
Goods Consigned (+) Consignor Direct Expenses Freight Loading Charges	8,000 3,000	1,100 —	50 10	55,000 11,000
		1,100	60	66,000
(−) Stock-in-Transit		100	60	6,000
Goods Collected by the Consignee (+) Consignee Direct Expenses Octroi Unloading Charges	4,000 1,000	1,000 —	60 5	60,000 5,000
Stock received by the Consignee (+) Opening Stock with the Consignee		1,000 100	65.00 62.00	65,000 6,200
Total stock with the Consignee		1,100	64.73	71,200
Unsold Stock Goods Sold		80 1,020	65.00 64.71	5,200.00 66,000.00

Note

1. Rate Column

   The figures in the rate column should always be equal to the quotient of Value ÷ Quantity.

2. Stock-in-Transit

   Stock in transit has to be adjusted after adding the consignee direct expenses, if the expenses incurred by the consignee are relatable to it.

3. Goods Sold

   The value of Goods Sold represents the cost of consigned goods sold.

   It is the difference between the total cost of goods consigned with the consignee and the value of consigned stock unsold with him.

   This value is not made use of anywhere in problem solving and need not be calculated. It is shown in the statement to derive the quantity of unsold stock as a balancing figure, when it is not know.

4. Unsold Stock

   The value of unsold stock

   = Quantity of unsold stock × Rate of valuation

   The rate of valuation is dependent on the method of stock valuation being adopted by the organisation.

   In general, there are three methods in use for valuation.

   • FIFO, 65.00
   • LIFO, 62.00
   • AVERAGE, 64.71

   In the absence of an instruction to adopt a specific rate, we adopt FIFO method for valuation.

5. Opening Stock

   The value of opening stock is added up to the stock consigned in the current period to obtain the total value of stock with the consignee.

When there is opening stock with the consignee, the rate of valuation of stock is to be ascertained based on the method being adopted for stock valuation.

Stock received (current period) (+) Opening Stock	1,000 100	65.00 62.00	65,000 6,200
Total stock with the Consignee	1,100	64.71	71,200

FIFO Method

The FIFO (First in First Out) method assumes that stocks with the consignee pertaining to the previous period would be disposed off first and then only the current period stocks would be used for being sold.

	Rate	Qty (in)	Sold (out)	Unsold stock
Received (current period) (+) Opening Stock	65.00 62.00	1,000 100	920 100	80 0
Total stock	64.71	1,100	1,020	80

Thus, whatever stock lies unsold with the consignee at the end would be from the stock consigned in the current period.

In such a case, it would be appropriate to value stock at the rate at which goods have been consigned in the current period i.e. @65.00 per unit.

Value of unsold stock

= 80 units × 65.00/unit

LIFO Method

The LIFO (Last in First Out) method assumes that stocks with the consignee pertaining to the current period receipts would be disposed off first and then only the previous period stocks would be used for being sold.

	Rate	Qty (in)	Sold (out)	Unsold stock
Received (current period) (+) Opening Stock	65.00 62.00	1,000 100	1,000 20	0 80
Total stock	64.71	1,100	1,020	80

Thus, whatever stock lies unsold with the consignee at the end would be from the stock consigned in the previous period.

In such a case, it would be appropriate to value stock at the rate at which goods have been consigned in the previous period.

Value of unsold stock

= 80 units × 62.00/unit

Unsold stock > Opening Stock

Where the closing or unsold stock is in excess of the opening stock,

Assume in the above example, goods sold is 950 units and unsold stock is 150 units.

	Rate	Qty (in)	Sold (out)	Unsold stock
Received (current period) (+) Opening Stock	65.00 62.00	1,000 100	950 0	50 100
Total stock	64.71	1,100	950	150

• the total stock may be valued at the opening stock rate

  Value of unsold stock

  = 150 units × 62.00/unit

• 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.

  Value of unsold stock

  = 100 units × 62.00/unit + 50 units × 65.00/unit

AVERAGE Method

The AVERAGE (Weighted Averages) method assumes that stocks are mixed up and there is no specific identification as to whether the previous period stock is being sold or the current period stock is being sold.

Thus, whatever stock lies unsold with the consignee at the end would be from a mix of the stocks consigned in the previous period and the current period.

In such a case, it would be appropriate to value stock at the rate that represents an average of the rates at which goods have been consigned in the previous period and the current period i.e. @64.71 per unit.

Value of unsold stock

= 80 units × 64.71/unit

Simple and Weighted

Simple average of rates

	=	Sum of all the rates Number of rates
	=	65 + 62 2
	=	127 2
	=	63.5

Weighted average of rates

	=	Sum of all the rates taking quantity as weights Sum of weights
	=	Sum of product of rates and respective quantities Sum of Quantities
	=	Sum of values 1,000 + 100
	=	65 × 1,000 + 62 × 100 1,100
	=	65,000 + 6,200 1,100
	=	71200 1,100
	=	64.73

No Opening Stock

In the absence of opening stock, the method of valuation of unsold stock, becomes irrelevant as the LIFO method becomes irrelevant and the rates under the other methods would work out to be the same.

Stock received (current period) (+) Opening Stock	65.00 —	65.00 —	65,000 —
Total stock with the Consignee	1,000	65.00	65,000