INTRODUCTION

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

So the 1P is Rs. 250 and the Profit is Rs. 50. Now you can verify that the profit is 20% on invoice Price.

 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.

4 IP is given and the profit is given as a percentage of CP: Suppose the IP is Rs. 600 and Profit is 20% on CP then CP will be calculated as follows.

So the CP is Rs. 500 and Profit is Rs. 100. Now you can verify that the profit is

20% on cost