CMA Foundation · Fundamentals of Financial and Cost Accounting · Consignment
Kaveri Ltd invoices consignment goods at 20% above cost. At the year end, unsold stock with the consignee is valued at invoice price of ₹48,000. What amount should be created as stock reserve?
The stock reserve is ₹8,000. Because goods are invoiced at 20% above cost, the loading forms one-sixth of the invoice price. One-sixth of ₹48,000 is ₹8,000. Applying 20% directly to the invoice value uses the wrong base and gives ₹9,600.
- A₹8,000Correct
- B₹9,600
- C₹12,000
- D₹40,000
Explanation
Invoice price is 120% of cost, so loading is 20/120 of invoice price. Stock reserve = 48,000 × 20/120 = ₹8,000. Charging 20% on the invoice value gives ₹9,600, the wrong base. Cost of stock is ₹40,000, not the reserve.
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