One of the common statements I hear when discussing accounting for landed costs is "I need a system that will retrospectively adjust the average cost of inventory and all invoices once I have all the actual landed costs".
The thinking behind this is that actual landed costs need to be 100% right at the time of reporting. But do they really? Let's think it through.
More often than not, the freight forwarding companies supplier bills don't arrive until 4 -6 weeks after delivery. By that time, original inventory of the goods in question might not be on hand.
Your software then needs to go back and change all journals relating to bringing to account the inventory. Then it has to adjust the unit cost of goods sold of all invoices to date for the stock sold, linked to a specific goods received. This could potentially be in a previous closed reporting period.
The problem here is that there are quite a few variables in the process. As a result, the financial adjustments required don't provide enough information of value to warrant such an adjustment. Realistically, if the impact on gross margin was significant enough you would most likely be employing standard cost as your inventory valuation system rather than average cost anyway.
By using the Shipping module found in ERP systems and some entry level enterprise accounting systems you can achieve fairly accurate average cost with very little variance. Take the following example (assume all values are in local currency):
You purchase 20 widgets from overseas at $50 per unit
|
Product |
Qty |
Unit Price |
Total Ex Price |
|
Widget |
20 |
$50.00 |
$1,000.00 |
You receive your Customs shipping documents and accompanying supplier invoice which advises the following:
|
Duty |
$50.00 |
|
Customs Handling fees |
$105.50 |
|
International Freight |
$660.00 |
Your domestic freight forwarder delivers the widgets with a delivery advice; however there is no supplier bill and your warehouse needs to receipt the product and fulfil existing sales orders.
Your initial goods received process will account for the inventory at local currency unit cost. The customs and shipping charges are then added to the unit cost. When accounting for the domestic freight you will need to enter the quoted figure or an estimation. By estimating the freight, this will account for the majority of the freight and leave you minimal landed cost variance. The initial entries below will bring the stock into inventory with an average cost of $103.28 per unit.
|
Debit |
Inventory |
1,000.00 |
|
|
Credit |
Goods Received |
|
1,000.00 |
|
Debit |
Inventory |
50.00 |
|
|
Debit |
Inventory |
105.60 |
|
|
Debit |
Inventory |
660.00 |
|
|
Debit |
Inventory |
250.00 |
|
|
Credit |
Shipping Fees |
|
815.60 |
|
Credit |
Domestic Freight |
|
250.00 |
|
Debit |
Shipping Fees |
815.60 |
|
|
Credit |
Accounts Payable |
|
815.60 |
A week later you receive your supplier bill from your domestic freight forwarder for $280.00 and process the following entry:
|
Debit |
Domestic Freight |
280.00 |
|
|
Credit |
Accounts Payable |
|
280.00 |
The resulting supplier bill from your domestic freight company results in a variance in your Profit & Loss of $30 debit with the estimated $250 absorbed in the products average cost. The resulting landed cost per unit of $103.28 will vary by $1.50 from what would have been the actual landed cost per unit of $104.78 if the domestic freight supplier's bill had arrived with their delivery docket.
In the scheme of things, whether you add more zeros to the example or not, as long as the estimate for any missing actual landed costs are reasonable, then the variance is negligible. If the goods are sold in the same month, then the impact is Nil on the profit & loss if the variance is accounted for in cost of goods sold.
To view an example of a landed cost process being handled in an ERP operational system, watch our Quick Tips video
