Landed Costing of Inventory Items (Page 1 of 2)

From what I am given to understand, you have to set up a manufactured item called "item A" in the inventory lists, also set up as purchased items "Item A-1", "Item A-2" Freight A" "Customs A".

Create a manufactured item A made of x parts A-1, A-2, Freight A, Customs A

Receive in items A-1, A-2, freight A and customs A, then create your manufactured item A.

Does that make sense, and is it the information you were looking for?

You can register additional costs in GL items section of purchase invoice.

Thanks, Mac

Yes, this is a concept foreign to those who have no use for it. It is far more a management tool than a "bookkeeping for tax purposes" general ledger entry. And there is far more than just shipping, there is VAT (I have businesses in China and the UK, as well as the US and VAT is a fact of life in the UK, as duty can be, also.) There are also costs such as drayage from port to warehouse and demurrage on the time the container is sitting on your property.

All of these need to calculated as costs of the particular item, not expenses down the COA, in order to tell what youare really making (and give a realistic markup / gross profit) per item.

Amazingly, there are a number of Point-of-Sale (computer cash registers) software packages that offer this, but few accounting programs. MYOB for the US market in the 1900's did, and there are add-on modules for other mid and high priced PC based programs, but nothing for a free or low-cost online package.

Doing a simple Google of "landed costs" will show there is quite a bit of talk about this method. Here's just one link - http://www.joc.com/2010/10-tips-understanding-total-landed-and-delivered-costs

Ye olde Excel

Item Code| Qty x Cost Ea = Total Cost + Shipping In (prorated by item weighs) + VAT (prorated by item value) = Grand Total / Qty = Landed Cost Per Item x Factor = Selling Price in USD x Conversion Rate = Actual Selling Price in GBP

Fortunately just a couple of dozen items. I dropship for Ebay sellers by air mail worldwide, but 80% is to the UK and by November 1 the mail is so backed up Christmas presents won't make it in time. So I have the truly hot movers in the UK for established sellers who depend on me the other 10 months.

So, I can go through it once and get a good idea. Shipping will vary a bit depending on the mix in the cartons, but VAT is constant and there is no duty on my goods, so I can get an idea of pricing and leave a bit of cushion. Nothing to stay awake over, but someone else started a thread and I replied. Then the forum powers that be decided to fork this off on it's own.

Hi Vdonatiello,
I am not sure if I quite understand what you mean by "slight difference". Do you refer to the fact the the landed cost is not always exactly the same from PO to PO? If so, then yes, the only way I can see to incorporate the landed cost into stock value is to adjust the purchasing prices before receiving the goods. I am actually a bit surprised that this has not been implemented into FA so far, since I believe it´s rather simple: All they would need is a couple of fields where one could put both label and amount. Then the total amount is calculated and distributed over the individual lines proportionally either by amount, quantities or just equally (I can´t think of any other distribution model currently).
Does this answer your question?

Hi Vdonatiello,
I am also neither accountant nor programmer :-)

I hope I can answer your questions:

I think all you need to do is to calculate the total amount of additional costs (shipping costs, customs etc.) and distribute it according to your preferences over the PO.

Example:
Your PO has the following two items:

Item1, 1 piece, $200
Item2, 1 piece, $800
Total PO: $1,000

Your additional costs are $100, which is 10 % of the PO. Then, you just need to increase every single PO line by 10 %:

Item1, 1 piece, $220
Item2, 1 piece, $880
Total PO: $1,100

Now, when you receive the goods into stock, the additional costs become part of your stock value. (Of course, you must not post these additional costs as expenses.)

If I understand correctly, you are asking if it´s correct to evaluate the entire existing inventory with the latest COGS. Example:

ItemA, current stock qty: 1 piece, current stock value (landed cost): $100

Then you purchase another item, let´s say landed cost $150, 1 piece

If you "value the inventory based on the latest COGS", then your new stock value would be:

ItemA, 2 pieces, stock value: 2*$150 (latest COGS) = $300.

I would say this only makes sense if for example you want to sell the inventory based on it´s current market value. For costing purposes, to me it looks wrong because you did not really have a cost of $300.
Even worse: When your latest COGS would be lower than the COGS of the existing value, you would basically depreciate stock value. But this is just my personal opinion.

I totally agree, it´s amazing that such a great piece of software is made available for free.

Hi Janusz,

thank you very much for your comment, it is great to see that FA is indeed an actively developed product, with the community actually having an influence. Great stuff, thank you very much.

Regarding your questions, I´d like to throw in my two cents. As I mentioned, I am neither a programmer nor an accountant, but based on my work experience I believe I can contribute a bit here. Please allow me a few comments.

I basically agree, proportioning the costs based on item values is probably the most widely used procedure. However, in order to keep it very flexible, I would suggest FA offers three different options as how to calculate the cost proportion:

Based on:
a) item value (as you suggested)
b) item quantity
c) number of invoice lines (e. g.: 4 lines, then every line receives 1/4th of the landed cost)

From my point of view this could be very easily implemented in one and the same function, something like this:

Function CostAllocationPercentagePerInvoiceLine()

If method ="item value" then
return line_value/ total_value

else

If method ="item quantity" then
return line_quantity/ total_quantity

else

If method="invoice_lines" then
return 1/total_number_of_invoice_lines

End If
End If
End If
End Function

You are precisely describing the problem. My thought is this: The process of converting costs to "landed costs", i. e. stock value, should happen as late as possible, because this is when most information is available. Also order quantities might differ from shipped quantities, and costs should be calculated based on the real stock. That's why I would suggest to do this cost allocation just in the very moment when receiving the goods into the warehouse. I could see one of the following scenarios:

a) Simplest solution: Add landed costs as one lump sum
When receiving goods into the warehouse (i. e. receiving the Purchase Order (PO)), FA could offer one single field where the user types in the total amount of all additional costs (same currency as the PO). In this case, these costs need to be calculated externally, this would typically happen in Excel. This would be a great improvement already.
It might happen that for example the shipping company did not yet provide the invoice for this particular invoice. In this case, an estimated value could be used. All the accountant would need to do is to post any difference between estimated and real invoice amount as expense (or income). That´s not "perfect", but much better than not incorporating the costs at all. And of course, that´s perfectly legal (at least in the countries I know, but one always needs to check locally).
Next to the field with the amount there should be a pull down menu that offers the different options as how to distribute the costs (by value, quantity or item line).

b) Keeping record of the different costs
In a more elaborate version FA could offer a separate page when receiving the goods, where all details about the costs being incorporated into stock value could be stored, e. g.:

Supplier, Invoice number, Invoice date, Description (e. g. shipment, or customs), and amount

The impact on stock value would obviously be the same, but this way it would be easier later to figure out what was posted into stock value. This could be extraordinarily helpful for example when a company is being audited, or simply if somebody wants to verify later if all was done properly.

On top of this, I would even recommend allowing to choose the currency for every invoice, and store the used exchange rate in the database.

Again, that's just my personal thoughts on this topic.

Thanks again for considering all this.

Could be, but I think this would not really be a "4th option", but rather an additional approach. The system I described always calculates a certain percentage for each line, and they always add up to 100 %.

To implement what you are suggesting, for each line in the PO there should be one additional field, something like "additional costs". Then, when receiving the goods, the sum of purchase amount and additional costs would be posted. Actually, I could see both systems working hand in hand at the same time. So if some costs could be related to only one or some of all purchased products, your approach would make sense. All other costs that are related to the entire purchase order would be distributed according to the system I described above.

Allow me two questions:

What´s the business meaning behind this approach?

What proportion goes to each line?

To me it looks like that in this approach, the order of items would matter. Frankly, I don´t see the business application, but I might be wrong and I´d appreciate you could explain it a bit more detailed.

In my very personal opinion, this looks far too complicated to be implemented. In this particular case, I would rather calculate the costs per line externally (like in Excel), and then just type in the amounts in a simple field.

Hi ctisystems
.
thank you for supporting our case and adding a legal component to it.

We can only hope and wish that FrontAccounting will one day include this essential feature.

On my end, I have to say that I really tried with FrontAccounting, but there is no development whatsoever regarding Landed Costs, and I gave up.

I found a solution for me, it`s called "webERP", it makes it very easy to calculate and include the landed costs. One can create "shipments", and then include one or several Purchase Orders into this shipment. Simple, straight to the point, does what it promises.

Besides for my own purpose I´m a reseller and I now offer webERP hosting to my customers. Therefore, I have a demo installation, and if you are interested, just feel free to check it out. It´s a full version, you can try whatever you want. The login details are given on the login page:

https://www.justcorebusiness.com/demo/webERP/

Maybe this could also be "food for thought" for the FA guys. There is simply no alternative for the concept of Landed Costs, if you claim to be offering a professional accounting software.