Landed Cost and Freight FAQs

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Landed Cost and Freight FAQs

Home| FAQs & Troubleshooting Show/Hide All Click a question below to view the answer. How can I make sure that the proper amount of freight costs to be allocated to each inventory item received is calculated? Some businesses may be required to include estimated landed costs or freight costs in the cost of inventory. Others may want to factor their estimated landed costs and freight costs into the value of their inventory, so that gross profit can be more accurately stated. The Purchase Order module provides four allocation methods. These methods are used to allocate estimated landed costs and freight costs to inventory. The allocation methods available are Quantity, Weight, and Cost. In addition, the Volume allocation method is available for landed costs. To allocate landed costs to inventory, the following conditions must be met. The Inventory Management module must be integrated with Purchase Order. Landed cost types must be set up in Landed Cost Type Maintenance. Each landed cost type must be assigned an expense account number. The Landed Cost feature allows you to enter estimated landed costs in Receipt of Goods Entry, thereby allocating costs to inventory. The following examples illustrate general ledger posting entries for landed cost items. Example 1 - Posting for a receipt of goods entry with landed cost to be allocated The following entry illustrates the posting for a receipt of goods entry with a landed cost entry to be allocated. G/L Account Inventory Purchases Clearing or Accounts Payable Expense Debit 1000.00 _______ 1000.00 Credit 900.00 100.00 1000.00

The amount posted to the Inventory account consists of the item cost plus the allocated landed cost. The amount posted to the purchases clearing account or accounts payable account (depending on whether the receipt of goods has an invoice entered), is the amount in Receipt of Goods Entry. The expense account selected for the landed cost type in Landed Cost Type Maintenance should be a contra-account used exclusively for allocated landed costs. The amount posted to the expense account is the total landed cost entered in Receipt of Goods Entry. For more information, see Account Maintenance. Example 2 - Posting for a receipt of goods entry with a landed cost entry to be allocated for standard cost items The following entry illustrates the posting for a receipt of goods entry with a landed cost entry to be allocated for standard cost items. G/L Account Inventory Purchases Clearing or Accounts Payable Expense Purchase Order Variance Account Debit 900.00 Credit 900.00 100.00 _______ 1000.00

100.00 1000.00

Example 3 - Posting for the sale of inventory items (normal processing) The following entry illustrates the posting for the sale of inventory items (normal processing). G/L Account Debit Credit

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Landed Cost and Freight FAQs

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Cost of Goods Sold Inventory

1000.00 _______ 1000.00

1000.00 1000.00

The cost of goods sold account consists of the item cost plus the allocated landed cost. The inventory account consists of the item cost plus the landed cost. The following examples illustrate the effects of freight allocation on general ledger postings. A typical general ledger posting for a $300.00 invoice processed in Receipt of Goods Entry is shown. Example 4 - Receipt of goods and receipt of invoice are processed at the same time without allocating landed cost The following entry illustrates that the receipt of goods and receipt of invoice are processed at the same time without allocating landed cost. Item Receipt (Product A) Item Receipt (Product B) Freight Amount Invoice Amount G/L Account Inventory - Product A Inventory Product B Freight Expense Accounts Payable Debit 50.00 150.00 100.00 ______ 300.00 Credit

300.00 300.00

Example 5 - Landed and freight costs are allocated to inventory using the Cost factoring method The following entry illustrates the same invoice when the landed and freight costs are allocated to inventory using the Cost factoring method. In this situation, the vendor for the purchase order is not the same as the vendor for landed cost. NOTE There may be situations where the vendor for the purchase order is the same for both the receipt of goods and landed cost. Item Receipt (Product A) Item Receipt (Product B) Landed Cost Invoice Amount G/L Account Inventory - Product A Inventory Product B Freight Expense Accounts Payable Debit 75.00 225.00 ______ 300.00 Credit

100.00 200.00 300.00

Example 6 - Processing of freight invoice in Accounts Payable The following entry illustrates the processing of the freight invoice in Accounts Payable. Landed Cost Invoice Amount G/L Account Freight Expense Accounts Payable Debit 100.00 ______ 100.00 Credit 100.00 100.00

One of the allocation methods (Weight, Cost, Quantity, or Volume) must be assigned to each landed cost type. When the conditions have been met, Receipt of Goods Entry (with an invoice number entered) calculates the proper amount of freight costs to allocate to each inventory item received. Daily Receipt Registers/Update includes freight when posting to General Ledger to the appropriate inventory account in lieu of a posting to the freight expense account. How do I set up options for landed cost and freight processing? In Purchase Order Options, the Allocate Freight on a Line Item Basis field is available only if the Allows Entry of Landed Costs check box is cleared. The system defaults to a landed cost type of FRGHT that is used for allocation of freight based on the allocation method specified. If the Automatic Update check box is selected in Landed Cost Type Maintenance for FRGHT and freight plus prepaid freight from the purchase order or a freight amount is entered in Receipt of Goods Entry, the Landed Cost button will display automatically in Receipt of

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Landed Cost and Freight FAQs

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Goods Entry. For more information, see Purchase Order Options - Fields. If the Include Allocated Cost in Default Unit Cost check box is selected in Purchase Order Options, the total last cost (which includes any allocated costs) is used as the default in Purchase Order Entry, Receipt of Goods Entry, and Receipt of Invoice Entry. Any inventory item that is subject to landed cost allocation should have the Allocate Landed Cost check box selected in Item Maintenance. (For more information, see Item Maintenance - Fields.) Any miscellaneous charge code that is subject to landed cost allocation should have the Allocate Landed Cost check box selected in Miscellaneous Item Maintenance. (For more information, see Miscellaneous Item Maintenance - fields.) If this check box is selected, the Landed Cost check box in Purchase Order Entry and Receipt of Goods Entry will be selected by default, but can be changed. When using the Weight or Volume allocation method, the weight and volume should be entered at the Weight and Volume fields in Item Maintenance. Weight and volume cannot be entered for special or miscellaneous charge codes; therefore, special and miscellaneous charge codes are not included in any landed cost allocations that use an allocation method of Weight or Volume. In Receipt of Goods Entry, with or without an invoice, you can enter as many landed cost types and amounts as needed by using the Landed Cost feature. If the Automatic Update check box is selected for the FRGHT cost type in Landed Cost Type Maintenance, the freight amount appears automatically in the Landed Cost Entry window in Receipt of Goods Entry. NOTE Weight and volume amounts in Item Maintenance should be entered as numbers only, without a description (for example, enter 35 instead of 35 lbs). The Daily Receipts Register prints all landed cost types and amounts entered in Receipt of Goods Entry if the Print Landed Cost Allocation Detail on Register check box is selected in Purchase Order Options. The Daily Receipts Register/Update posts the allocated landed costs to the item's cost in inventory and the expense account entered for the Cost Type in Landed Cost Type Maintenance. In addition, the receipt history will be updated with the landed cost information and can then be printed on the Receipt History Report. WARNING Changing the allocation method or general ledger account number in Landed Cost Type Maintenance may cause difficulty when attempting to reconcile the general ledger. Can freight expenses be paid before the receipt of inventory and the corresponding invoice? Yes, freight expenses can be paid before the receipt of inventory and the corresponding invoice. Prepayments are usually recorded in Manual Check and Payment Entry, Invoice Payment Selection, Transaction Journal Entry, or General Journal Entry. These prepaid freight expenses can be allocated to inventory. In addition to meeting the conditions listed for the allocation of standard freight, you must also assign an account number at the Prepaid Freight Expense Account field in Purchase Order Options. This account is credited during the Receipt of Goods/Invoice Data Entry update. The original posting recorded in the Accounts Payable or General Ledger module is then reversed. This example illustrates a $312.00 invoice processed in Receipt of Goods Entry, with $50.00 of the freight expense prepaid. This posting reverses an entry to prepaid freight that was originally recorded in the Accounts Payable or General Ledger module. Item Receipt (Product A) Item Receipt (Product B) Invoice Amount Prepaid Freight Amount For more information, see: Landed Cost Type Maintenance Allocate Freight Costs to Inventory Without Landed Costs Why was the landed cost not applied to my miscellaneous charges? Landed cost does not apply to charges because there is no cost. Why is the amount of my landed cost showing on the Daily Transaction Register as a credit, and not a debit? G/L Account Inventory - Product A Inventory Product B Accounts Payable Prepaid Freight Expense Debit 75.00 225.00 ______ 300.00 Credit

250.00 50.00 300.00

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Landed cost type accounts are offset accounts. The amount of landed cost is allocated to items and is posted to the inventory account (or special item/PO variance account), with the offset amount being to the landed cost type's general ledger account. I did not create the FRGHT landed cost type. How was it created? The FRGHT landed cost type is automatically created when the Purchase Order module is activated, and can be maintained but not deleted. The landed cost FRGHT was allocated to my items when I posted my receipt of goods without an invoice, but I had cleared the Allow Entry of Sales Tax and Freight Without an Invoice check box in Purchase Order Options. What happened? Selecting or clearing the Allow Entry of Sales Tax and Freight Without an Invoice check box in Purchase Order Options does not apply to landed cost. It applies only to sales tax and freight (allocated or not). If there is freight on the purchase order and you have selected the Automatic Update check box for the FRGHT landed cost type in Landed Cost Type Maintenance, the freight amount on the purchase order will automatically write to the FRGHT landed cost type on the Landed Cost Entry window in Receipt of Goods Entry. The Freight Amount field in Receipt of Goods Entry for receipts without an invoice is available only if the Allow Entry of Sales Tax and Freight Without an Invoice check box is selected in Purchase Order Entry. The new unit cost on the Daily Receipts Register for the standard item shows one amount, but was posted to inventory for a different amount. Why? The Daily Receipt Register calculates a new unit cost for the standard item to include allocated costs, but posts to inventory at the standard cost. An adjustment is made to the PO variance adjustment account for the difference between the standard cost and the new unit cost.

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