Definition and explanation
Overriding commission is a type of commission which a consignor grants to the consignee who achieves a specific sales target or whose total sales revenue exceeds a specified amount. It encourages consignee to realize the best possible price for goods sold. Sometime it is given to consignee as an incentive for putting his efforts to introduce, promote and create market for a new product in certain areas.
Overriding commission is an extra commission which is awarded to the consignee in addition to his ordinary or regular commission. Consider the following example to understand how this type of commission is allowed and calculated:
On 1st August, 2019, Ali Brothers of Kolkata sent on consignment to Rana Brothers of Chennai 1,000 packets of goods costing Rs 500 each and paid Rs 2,000 for loading, Rs 5,000 for freight and Rs 8,000 for insurance.
Rana brothers paid Rs 1,500 for unloading, Rs 1,800 for godown rent and Rs 3,500 for advertising. Rana brothers reported that 800 packets were sold for Rs 600,000. They were entitled to an ordinary commission of 10% on regular selling price and an overriding commission of 15% on any amount realized over and above the regular selling price. The regular selling price was Rs 650 per unit (i.e., cost plus 30%).
Rana Brothers sent payment for the balance due directly to the bank account of Ali Brothers via internet banking.
Required: Draw up consignment to Chennai account, Rana Brothers account and goods sent on consignment account in the books of Ali Brothers. (The detailed calculation of consignee’s commission and the value of stock on consignment should be the part of your answer).
1. Consignment to Chennai account:
Working note 1: Calculation of commission:
Ordinary commission + Overriding commission
= [(800 × 650) × 0.1] + [(600,000 – 520,000) × 0.15]
= [520,000 × 0.1] + [80,000 × 0.15]
= 52,000 + 12,000
= Rs 64,000
Working note 2: Calculation of stock on consignment:
= Cost of 200 units + Proportionate non-recurring expenses
= [(200 × 500) + (*16,500/1,000) × 200]
= 100,000 + 3,300
= Rs 103,300
*Non-recurring expenses: 2,000 + 5,000 + 8,000 + 1,500