How to Setup & Process Landed Costs

Landed Cost

The landed cost includes the original price of the product, transportation fees (both inland and ocean), customs, duties, taxes, tariffs, insurance, currency conversion, crating, handling and other payment fees. 

The purchase price is traditionally the "cost" of the product. However, for some products the other costs can be a big part of the cost for purchasing the goods. For these products it's important to track these other "landed costs". 

Landed costs are costs that according to GAAP should be part of cost of goods sold (COGS). COGS can be divided into the following basic parts:

• The purchase prices
• Customs, Duty, or other fees related to the purchase
• Freight
• Other handling fees

CBOS supports the following functionality associated with tracking and posting landed costs:

• Multiple landed cost elements such as freight, customs, duty, etc. may be tracked
• Multiple landed cost distribution methods such as quantity, weight, volume, etc. are available to be selected to distribute costs across multiple items on a given purchase order or vendor invoice
• Multiple purchase order receipts may be assigned to a given vendor invoice for landed cost calculation and posting
• Landed costs may be included in the vendor invoice associated with the actual purchased items or in a third-party invoice for freight, customs, duty, etc. 
• Estimated landed costs may optionally be calculated on purchase orders
• Estimated landed costs are posted to inventory when the purchase order material receipt is completed
• The difference, if any, between the purchase order estimated landed cost and the actual invoiced landed cost is posted to inventory when the vendor’s landed costs AP Invoice is completed
• The actual landed cost can also be calculated on a vendor invoice associated with a given purchase order receipt without having the estimated landed cost calculated on the related purchase order
• Each product that is included in a landed cost purchase order receipt and / or vendor invoice, will have its "Current Cost Price" updated to include one or more elements of landed cost

Setup

Landed Cost Clearing Account

If not already available, add an account number for landed cost clearing. This is the account used for "estimated" landed cost posting and its balance should reflect the difference between the purchase order Material Receipt and the Landed Cost Invoice posting. This account number will have postings against it from the material receipt (Credit) and the landed cost invoice (Debit) based upon the estimated landed cost from the purchase order associated with the receipt. 

Accounting Schema Default:

The accounting schema Landed Cost Clearing category should be assigned the clearing account number setup in the previous section. The account number assigned here is used when posting estimated landed cost from a purchase order receipt. 

Accounting Schema assigned values may be overridden at the Product Category and Product levels in their respective Accounting Tab, otherwise the accounting schema account values will be used. 

Product Category:

Products:

Charge Type for landed cost:

In order to add landed cost charges to a supplier bill, you will need to setup a charge code with an assigned charge type that supports AP Invoice processing. In this example, we have added a charge type "Ship PO" for use with "Charge Codes" used for vendor freight charge invoice lines. 

The charge type by document type window is used to associate the charge type to various document types. "AP Invoice" must be one of these document types in order for Charge Codes associated to this charge type to be referenced on invoice lines for landed costs.

Charge Code for landed cost:

In order to add freight charges to a supplier bill, you will need to also setup a Charge Code for freight and assign it to a Charge Type associated with AP Invoice document types. Freight costs are added as line items referencing this Charge Code in the vendor landed cost invoices. In this example, we have added a charge code "Freight" for use with vendor freight charge invoice lines. 

Assign an account number for freight charges to the charge code in the accounting tab window.

Cost Elements for Landed Cost:

Multiple landed cost elements such as freight, customs, duty, etc. may be tracked. You may define multiple landed cost elements to track, however you will need to create at least one for landed cost charges to be allocated. The cost element type should be "Material" and the costing method left blank on all defined elements. 

These cost elements will be referenced in the Purchase Order "Estimated Landed Cost" and the AP Invoice "Landed Costs" windows. Multiple "Estimated Landed Cost" and actual "Landed Costs" charges may be added with each assigned a Cost Element that describes the nature of the charge. In this example, we have added a Cost Element for "Freight" and for "Customs" for use with vendor freight charge invoice lines and estimated purchase order landed costs. 

Processing Flows:

In order to demonstrate the various features available with landed cost processing, we will cover two different business process flows. The examples will progress from the least to more complex scenarios. 

AP Freight Invoice – add Landed Costs – (example 1)

In this example, we will add actual billed freight charges to the purchase cost of multiple items on a single purchase order receipt. The freight charge invoice will be from a third-party freight company, rather than the actual product vendor. The freight charges could also be added on to the product vendors invoice as a separate line item and the processing would work the same.

In order to illustrate this example, we will process through the following steps:

1. Review product cost prior to any new product or landed cost additions
2. Create a new purchase order for two different products
3. Generate a material receipt for the purchase order
4. Generate an invoice for the purchased products
5. Review product cost after product invoice posting
6. Enter a freight invoice for the landed costs from a third-party freight vendor
   1. Associate the freight invoice to the products material receipt
   2. Calculate and Distribute the landed cost to the items on the receipt
   3. Post the landed cost to inventory

7. Review product cost after third-party landed cost invoice posting

Step 1 – Review Product Cost (prior to any processing) for items used in this scenario

The current cost price of these two items represent the cost prior to the product and landed cost invoice being created and posted. 

Product - L400

Product – L450

Step 2 – Create and complete a new purchase order for these two products

In this example, the purchase order price is equal to their current cost price. 

Step 3 - Generate and complete a material receipt for the product purchase order

Step 4 - Generate and complete an invoice (bill) for the product purchase order

If entering the invoice manually make sure to use create lines from to match against the purchase order and its material receipt. 

Invoice Line 1 – Match Receipt Posting: will debit or credit inventory and "invoice price variance" if the invoice line amounts differ from the products current cost price amount. It will also debit non-invoiced receipts. In this example, there is a $.01 variance between the invoice and current cost price. 

Invoice Line 2 – Match Receipt Posting:

Step 5 – Review the Product Costs (after product invoice processing) for items used in this scenario

In this example, the product current cost price remains the same since the invoice price equaled their current cost price.

Product - L400

Product – L450

Step 6 - Enter a freight invoice for the landed costs from a third-party freight vendor  

In this example, we are entering a freight bill from FedEx for charges related to the transportation of these two items. The amount of the bill for transporting both items is $25.00. 

Landed Costs – select cost element, cost distribution, and product receipt

We then select the Landed Cost tab to associate the freight charges to the Freight cost element previously defined. We also select the cost distribution method to use to allocate the freight cost across the material receipt line items. In this example, we have selected product weight as the distribution method. Finally, we enter or search for the material receipt to identify the products to allocate the landed cost to. In this example, we have searched and selected the material receipt created in Step 3 above. You may also select a receipt line or product to restrict the allocation to that line or product. 

The cost distribution methods available include:

• Quantity- Freight will be distributed based on the material receipt line quantity. (If there are two lines with 10 and 5 qty it will be distributed in ratio of 10:5)
• Weight – Freight will be distributed based on weights for the product updated on Product header. (for ex.- If there are two lines with Product A (3 Pound weight) and Product B (5 Pound Weight), it will distribute costs based on ratio 3:5)
• Costs – Freight will be distributed based on “Total Costs” for the line updated on PO line. (for example, If the PO line has two lines with 200 and 400 total costs, it will distribute on the basis of ration 2:4)
• Line – Freight will be distributed based on the no of lines. (for example, if there are 3 lines on the MR, it will distribute in the ratio of 1/3 for each).
• Volume – Freight will be distributed based on the volume of a product updated on Product header. 

Distribute Costs - calculate and distribute the landed cost to the items on the material receipt
After the Landed Cost information has been entered, you will select the Distribute Costs button to allocate landed cost across the material receipt items. The confirmation message below will display and you will need to click on the green checkbox to continue. 

This will create the landed cost allocation records shown below. 

Landed Cost Allocation – review the landed cost distribution to products on the material receipt

In this example, product weight was used as the basis of allocation with product L400 weighing 1 lb. and L450 weighing 2 lbs. Quantity Received x Weight = Base. (Base / Base Total) x Freight Amount = Amount for each product. For product L400: 1 x 1 lb. = 1. 1 divided by 3 = .3333 x $25.00 = $8.33 of freight charge allocated to the L400 item. 

Landed Cost Invoice Posting - Post the landed cost to inventory and update the product costs

The landed cost posting will debit inventory for the allocated amount to each product and credit accounts payable for the total freight invoice amount. Landed cost clearing is listed but only used for estimated PO freight covered later in this document. 

Step 7 – Review the Product Cost and Cost Movement (after landed cost processing) for items used in this example

In this example, the current cost price has now been updated for both items to include the landed costs associated with the freight invoice. Accumulated Amount / Accumulated Quantity = Current Cost Price.

For product L400 … $352.75 / 27 = $13.0648 current cost price. 

Product - L400

The cost movement tab will display the dollar amount of the landed cost added to inventory. 

Product – L450

The cost movement tab will display the dollar amount of the landed cost added to inventory. 

Estimated PO Landed Cost – (example 2)

In this example, we will calculate and post “estimated” landed cost based upon our purchase order and then enter and post “actual” landed cost based upon the vendor’s freight charges. The freight charges will be added to the vendors product invoice in this example, but could also be from a third-party freight company. The landed cost processing would work the same either way. 

Calculating and posting estimated landed cost based on a purchase order is optional and is not a prerequisite to calculating actual landed cost charges on a vendor invoice. 

In order to illustrate this example, we will process through the following steps:

1. Enter estimated landed cost on your product purchase order
   1. Select the cost element and cost distribution method
2. Complete the PO to allocate landed cost to the purchase order line items
3. Create a material receipt for the purchase order
   1. Review material receipt posting for landed cost estimates
4. Enter the vendor’s invoice for both the products and landed cost freight charges
   1. Add an actual landed cost charge line to the vendor invoice
   2. Add the landed cost record by assigning the cost element, cost distribution method, and associated material receipt records
   3. Distribute the landed cost which creates allocation records for the products on the material receipt(s)
   4. Review the landed cost allocations created above
5. Complete and post the vendor invoice which has both product and landed cost included on it
6. Review updated product costs which include the landed costs

Step 1 – Enter the estimated landed cost on your product purchase order

In this example, we have created a purchase order header and added two product lines on the purchase order. We are now ready to add the estimated landed cost for these two items. 

Step 1.1 - Click on the Estimated Landed Cost tab to enter the estimated landed cost, and select the cost element and cost distribution for the purchase order. In this example, the estimated landed cost is $25.00 for the purchase order with the cost element "Freight" and the Cost Distribution method of "Weight" being assigned. 

The cost distribution methods available include:

• Quantity- Freight will be distributed based on the material receipt line quantity. (If there are two lines with 10 and 5 qty it will be distributed in ratio of 10:5)
• Weight – Freight will be distributed based on weights for the product updated on Product header. (for ex.- If there are two lines with Product A (3 Pound weight) and Product B (5 Pound Weight), it will distribute costs based on ratio 3:5)
• Costs – Freight will be distributed based on “Total Costs” for the PO line. (for example, If the PO line has two lines with 200 and 400 total costs, it will distribute on the basis of ration 2:4)
• Line – Freight will be distributed based on the no of lines. (for example, if there are 3 lines on the MR, it will distribute in the ratio of 1/3 for each)
• Volume – Freight will be distributed based on the volume of a product updated on Product header 

Step 2 - Complete the PO to allocate landed cost to the purchase order line items 

Complete the PO and then click on the Estimated Landed Cost Allocation tab to review the allocated cost to each line.

In this example, "weight" was chosen as the cost distribution method. The allocation is calculated when the user "completes" the purchase order. On this purchase order, line 1 item has a weight of 1 lb. and the line 2 item has a weight of 2 lbs. The base amount is calculated by multiplying the weight x line quantity. 

For example, on line one Base = 10 ea. X 1 lb. = 10 lbs. On line two Base = 5 ea. X 2 lbs. = 10 lbs. 

The $25.00 landed cost estimate, is then split 50% to each respective line for a $12.50 estimated landed cost per purchase order line item. 

Step 3 – Create a material receipt for the purchase order and review the receipt posting

In this example, we have received 10 units of item L400 and 5 units of L450. 

Step 3.1 - Click on the Material Receipts tab and select the gray Posted button to review the receipt posting.

Material Receipt Posting will calculate the estimated landed cost using the allocation from Purchase Order. The amount will be posted (credit) to the landed cost clearing account. The product inventory account amount (debit) will include both the material plus the allocated landed cost amount. 

In this example shown below, the purchase order line 1 amount = $130.65 (based on the current avg. cost x quantity received) + $12.50 ($25.00 x 50%) of landed cost = $143.15 total debit to inventory. 

Purchase order line 2 amount = $101.83 (based on the current avg. cost x quantity received) + $12.50 ($25.00 x 50%) of landed cost = $114.33 total debit to inventory. 

Step 4 – Enter the vendor’s invoice for both the products and landed cost freight charges

The landed cost charges are entered as a separate charge line item on the vendor’s product invoice or as a charge line on a third-party vendor invoice who provided just freight related services. In this example, we will be adding the landed costs to the vendor invoice for product received. 

Step 4.1 - Add a landed cost charge line to the product or third-party vendor invoice

Click on Line Detail and then New to add a new line for landed cost freight charges. Under the Charge column, select the Charge Code setup previously for freight allocation, put in the actual freight cost under the Unit Price column and click Save. In this example, we are adding "$30.00" of actual landed cost for Charge code "Freight".   

Step 4.2 - Add the landed cost record by assigning the cost element, cost distribution method, and associated material receipt records

Next, click on the Landed Costs tab within the Bills window. Fill in the cost distribution, cost element, and receipt fields. The cost element may be selected from the drop-down list. The Receipt(s) should be associated with the purchase order that you are adding landed costs too. After choosing the Receipt you can also click on Receipt Line and push the freight towards just one product or enter a product to restrict the freight allocations to that product for this receipt.   

The Cost Distribution choices function as follows:

• Quantity- Freight will be distributed based on the material receipt line quantity. (If there are two lines with 10 and 5 qty it will be distributed in ratio of 10:5)
• Weight – Freight will be distributed based on weights for the product updated on Product header. (for ex.- If there are two lines with Product A (3 Pound weight) and Product B (5 Pound Weight), it will distribute costs based on ratio 3:5)
• Costs – Freight will be distributed based on "Total Costs" for the line updated on PO line. (for example, If the PO line has two lines with 200 and 400 total costs, it will distribute on the basis of ration 2:4)
• Line – Freight will be distributed based on the no of lines. (for example, if there are 3 lines on the MR, it will distribute in the ratio of 1/3 for each)
• Volume – Freight will be distributed based on the volume of a product updated on Product header

Step 4.3 - Distribute the landed cost which creates allocation records for the products on the material receipt(s)

Click the Distribute Costs gray button and click on the green box checkmark to continue. 

Step 4.4 - Review the landed cost allocations created above

Select the Landed Cost Allocation tab to review the allocation of freight.

For example, on line one Base = 10 ea. X 1 lb. = 10 lbs. On line two Base = 5 ea. X 2 lbs. = 10 lbs. also. 

The $30.00 actual landed cost, is then split 50% to each respective line for a $15.00 actual landed cost per purchase order line item.   

Step 5 - Complete and post the vendor invoice which has both product and landed cost included

Click on the Bills Header at the top and complete the Bill. (Document Action, Complete). 

Click on the Bills - Line Detail to review charges and amounts before posting.

Bill Posting:

The landed cost amount or in this case, the difference from the estimated amount, will be posted to the items inventory account. The Landed Cost Clearing account will have a debit entry equal to the estimated landed cost amount that was credited on the material receipt. 

The estimated landed cost amount in this example, was $12.50 for each respective product and the actual landed cost was $15.00 for each product meaning the difference in estimated versus actual landed cost was $2.50 for each product.

So, in affect, the inventory account balance now includes the landed costs. 

Line 1 – matched receipt posting

Line 2 – matched receipt posting

Step 6 - Review updated product costs

Product Costs:

The updated product costs may be reviewed in the Product Costs, Cost Movement and Cost Details tabbed windows.

Product Cost:

The current cost price will now include the landed costs. 

Cost Movement:

In this example, you can see the estimated landed costs from the purchase order receipt and the actual difference amount from the vendor bill landed cost line for the product on Line 1 of the purchase order and vendor bill.

Line 1 – L400

Cost Details:

In this example, you can see the estimated landed costs from the purchase order receipt and the actual difference amount from the vendor bill landed cost line for the product on Line 1 of the purchase order and vendor bill.

Line 1 – L400