12.0 OBJECTIVES
After studying this unit
you should be able to:
- Explain the meaning of invoice price and the reasons for consigning goods at invoice Price
- Compute cost price and invoice price in different situations
- Explaining the meaning sf loading and pass necessary entries for its adjustment in Consignment account
- Prepare books of the consignor and the consignee based on invoice price
12.1 INTRODUCTION
In Unit 10 and 11 you
have learnt about the recording of transactions relating to consignments in
books of both the consignor and the consignee. You know that the goods sent on
consignment are recorded in Consignment Account at cost price. Sometimes, the consignor
does not want to reveal the cost of goods to the consignee and, therefore,
invoices the goods at a price which is higher than the cost price. Such price
is known as 'invoice price' and the difference between the invoice price and
the cost price is called 'loading'. In such a situation, the entry for goods
sent on consignment is also recorded at the invoice price which would need an
adjustment for loading at the time of computing the profit on consignment. In
this unit you will lean1 how Consignment Account is prepared when the goods are
consigned at invoice price and how the necessary adjustments are made at the
time of working out the profit on consignment. You will also learn how the
invoice price is calculated when the loading is given in the form of a
percentage at the cost price or the invoice price.
12.2
CONCEPTS OF INVOICE PRICE
In Unit 11 you learnt
that when the consignor sends goods on consignment to the Consignee, he records
it in his books at cost and the same is reflected in the preform invoice.
Sometirnes, the consignor does not want the consignee to know the actual cost
of goods sent to him, in that case he would consigner the goods at a price
other than the cost price. Such, price would generally be higher than the cost,
It is called the invoice price. In other words the invoice price is equal to
the cost price plus a certain amount of profit.
Apart from the intention
of not revealing the cost of goods to the consignee there are a number of other
reasons why the consignor consignes the goods at invoice price. These are the:
i)
The consignee
will not be able to assess the profit earned on consignment and therefore may
not demand a higher commission.
ii) If the consignee knows about the actual cost of goods
he may resort to some dishonest practices such as buying goods for himself at a
lower price and then selling them at a higher price in the market.
iii) It would give a fair idea to the consignee of the minimum price at which he is to sell the goods.
You should note that
invoice price is not the same thing as selling price. The invoice price is the
price at which the consignor sends the goods to the consignee, whereas the
selling price is the price at which the consignee sells the goods to the customers.
Let us take an example in order to clearly understand the difference between
the three prices i.e., the cost price, the invoice price and the selling price.
Suppose Gopal consigns goods worth Rs. 15,000 to his agent Ashok at an invoice
price of Rs. 18,000. Ashok sells the goods at Rs. 20,000. In this example the
cost price (CP) of the goods is Rs. 15,000, the invoice price (IP) of the goods
is Rs. 18,000, and the selling price (SP) of the goods Rs. 20,000
You will observe that the
IP is higher than CP whereas SP is higher than the CP as well as the IP, and
that the SP and the IP are not the same. If, however, the Consignor directs the
consignee to sell the goods at invoice price itself, then the SP and the IP
will be the same.
12.2
CALCULATION OF COST PRICE AND INVOICE PRICE
You know the relationship
between the invoice price (IP) the cost price (CP) and the profit. This can be
expressed in the form of an equation as follows.
IP = CP +
Profit
With the help of the
above equation, you can find out the missing figure i.e., if any two figures
are given the third one can be worked out. For example, if the CP is given as
Rs. 150 and the profit as Rs. 50, the invoice price will be
IP = CP +Profit
= 150+50
= Rs. 200
Similarly, if invoice
price and profit are given as Rs. 200 and Ks. 50 respectively, the cost price
will be
IP = CP + Profit
200= CP+50
CP = 200.-50
= Rs. 150
In the above examples,
the profit is given as an absolute figure. But, in many cases the profit may be
given in the form of a percentage either on cost price or on invoice price. In
that case, the calculation of missing price may become difficult. Of course, if
the percentage of profit is based on the price, the figure of which is given,
you may not face much problem. But if the percentage of profit is based on the
price, the figure of which is not given, you may find it difficult to work out
the profit and so also the missing price. Let us take different situations
where the profit is given in the form of a percentage and we have to work out
the missing price. These situations are:
1 CP
is given and Profit is given as a percentage of CP, you have-to work out IP
2 CP
is given and Profit is given as a percentage of IP, you have to work out IP
3 IP
is given and Profit is given as a percentage of IP, you have to work out CP
4 IP
is given and Profit is given as a percentage of CP, you have to work out CP
Let
us take them one by one and find out the missing figure with the help of examples.
1 CP is given
and the profit is given as a percentage on CP
Suppose
the CP of a product is Rs. 200 which is invoiced at 20% profit on cost. The IP
Will
be calculated as follows.
IP = CP+ Profit
IP=200 + (20/100x200)
IP= 200 + 40
IP= Rs. 240
2
CP is given and the profit is given as percentage on IP
Suppose
CP of a product is Rs. 200 which is invoiced at 20% profit on 1P. IP will be
Calculated
as follows.
Let us assume that the IP is X
IP = CP + Profit
3 IP is given and the profit is given as percentage of IP : Suppose the IP of a product is Rs. 500 and Profit is 25% on IP. The missing figure i.e., the CP is worked out as follows.
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