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Difficulty: MediumTreatment of Normal and Abnormal Losses in Consignment

Kalu consigned 1,000 crates of soft drinks costing ₦2,000 per crate to an agent in Enugu. He paid carriage of ₦150,000 and insurance of ₦50,000. During transit, 100 crates were completely destroyed in an accident. What is the value of the abnormal loss in Naira (₦) to be credited to the Consignment Account?

Answer: 220000 ₦

Answer

The value of the abnormal loss to be credited to the Consignment Account is ₦220,000.
Abnormal loss is valued at cost plus its proportionate share of consignor expenses. Total outlay for 1,000 crates is ₦2,000,000 + ₦150,000 + ₦50,000 = ₦2,200,000, giving a cost per crate of ₦2,200. The 100 crates lost in transit are therefore valued at 100 × ₦2,200 = ₦220,000.

Step-by-Step Solution

1
Calculate the total prime cost of the consigned goods
1,000 crates × ₦2,000 = ₦2,000,000
Determine the basic purchase price of all items dispatched.
2
Sum all direct expenses incurred by the consignor prior to transit loss
₦150,000 (carriage) + ₦50,000 (insurance) = ₦200,000; Total outlay = ₦2,200,000
Consignor expenses add to the capital cost of the goods before reaching the destination.
3
Determine the effective cost per unit including consignor expenses
₦2,200,000 / 1,000 crates = ₦2,200 per crate
Find the unit cost to properly allocate values to lost items.
4
Compute the total valuation of the abnormal loss
100 crates × ₦2,200 = ₦220,000
Abnormal loss must be valued at cost plus a proportionate share of non-recurring expenses incurred up to the point of loss.

Key Concept

Valuation of Abnormal Loss in Consignment Accounting
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Topics

Treatment of Normal and Abnormal Losses in Consignment

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