Question

Differejce between normal and abnomal loss

Answer 1

Goods sent on consignment does not become the property of consignee as he has not bought them. The ownership of goods remains with the consignor until they are sold, so the goods appear as inventory in the books of the consignor, not the consignee.

The consignee tries to sell the goods according to the instructions of the consignor. When the goods are sold he will deduct his expenses, commission,etc., from the sale proceeds and remits the balance to the consignor. If the goods are destroyed, consignee will not be responsible. Its burden will fall on the consignor. There are two types of losses that can occur in consignment :

1] Normal Loss

The normal loss means loss which is inherited and can not be avoided. It should also be considered while valuing the closing stock.

To ascertain the cost per unit after the normal loss, we use the following formula:

Cost per unit =  (Total cost+ Expenses incurred) /(Total quantity – Normal loss)

For example: If a certain amount of oranges are consigned, some of them will be destroyed in loading and unloading whereas some of them will not be in a state to be sold. Suppose, 10,000 oranges were sent to the consignee at ₹30 per kg and freight of ₹60,000. It is known that there would be a normal loss of 10%.

Cost per kg = (300000 + 60000) /  9000 (i.e. 10000-10% of normal loss) = ₹40

If unsold quantity is 500 its value will be (500*40=20000).

Note: No entry is recorded for normal loss in the books.