If a company is unable to efficiently sell their inventory, they may ask another party to sell it on their behalf. In a consignment arrangement, the consignor still owns the inventory and maintains it in their accounting records, even though the consignee has physical custody. The consignor sets a price and the consignee usually receives a commission on the sale. Valuing consigned inventory is similar to any other type of inventory; it includes all of the costs necessary to bring the inventory to a usable condition. However, there are a few additional costs to consider.

Direct Inventory Costs

The cost of direct materials and labor used to create the inventory are included in inventory value. Direct materials are what's used to process the raw materials into finished goods. For example, paper and glue are direct materials in creating paper bags to be sold on consignment. Companies also should include the shipping costs they incurred in procuring direct materials. Likewise, direct labor includes the wages paid to the factory workers that create the finished product. Companies often use a standard costing system to estimate the amount of materials and labor in each unit of inventory.

Overhead

Unlike materials and labor, manufacturing overhead is an indirect inventory cost. However, it still needs to be allocated to the value of the inventory. The electricity, water, rent and property taxes for the factory are all considered manufacturing overhead expenses. Salaries for factory supervisors and other factory personnel are also included in manufacturing overhead. Be careful what salaries you include in this figure: non-factory salaries are considered selling, general and administrative expenses and aren't included in inventory costs.

Consignment Costs

Consignment inventory includes a few costs that normal inventory doesn't. The consignor may pay extra in wages for staff to unload and unpack the consigned goods. In addition, all expenses the consignor incurs to get the inventory to the consignee are included in the value of inventory. However, consignee fees aren't included in the value of inventory. Consignees might issue consignees a commission on each item sold, but accountants should record this as a debit commission expense and a credit to cash.

Obsolete Goods

Not every consigned good holds its value. Inventory that's fallen out of fashion or damaged could be less valuable or even obsolete. U.S. generally accepted accounting principles mandate that inventory is valued at the lower of cost or market. Both the consignor and consignee should be alert for inventory that's lost its value. The consignor should subtract the difference between inventory cost and market value from total inventory value.