Wednesday, May 13, 2009

Land of the Landed Costs- Part 1

Landed cost is the total cost it takes to "land" an item on your doorstep, including additional charges like freight, customs, and processing. More and more, I find that companies are interested in landed cost as they increase the use of international suppliers and manufacturers. By using landed cost, the "total" cost of the item is reflected in inventory and is valued as an asset, rather than immediately expensing those additional costs. Take the following example, where I purchase a widget from my European supplier:
  • Purchase 100 widgets @ $20/each
  • Overseas shipping costs are $1500
  • Customs, Duties, and other Processing Fees are $500
  • Domestic shipping costs are $400
If I were to value my widgets only at the cost from my vendor, the cost in inventory would be $2000 for the 100 widgets at $20/each. And then I would expense the additional $2400 in costs.
The situation changes though, if I am using landed costs. Using the same costs above, I would value my inventory at $4400 dollars in total, or 100 widgets at $44/each. Perhaps a more accurate picture of the inventory value? In turn, this increased cost will affect my Cost of Goods Sold on the sales side, impacting my margin appropriately.
So, now that we have an example, how about talking through how Landed Costs work in Dynamics GP? With Landed Costs in Dynamics GP, these costs can be:
  • Recorded as an estimate amount on a receipt
  • Matched to an invoice and revalued to provide a more accurate amount
There are five key aspects to Landed Costs in Dynamcs GP from my perspective:
  • Landed Cost Setup: Includes setup of individual landed costs, landed cost groups, and assignment to item/site combinations
  • Purchase Order Landed Cost: Assigning landed cost groups to POs
  • Receivings Landed Cost: Recording of landed cost groups on Receipts
  • Receivings Landed Cost Apportionment: Apportionment of landed costs across an entire receipt
  • Invoicing Landed Cost: Recording invoices for landed cost vendors and matching them back to the original product receipts
Let's take a look at each aspect. In this post, I will cover the setup items. And in my next post, I will cover the actual transaction entry. First, Landed Cost Setup.

Cards>>Inventory>>Landed Cost

This is where you can set up each individual landed cost that you plan to track. If you plan to match invoices for the landed cost, you will want to put in a Vendor ID. Matching invoices for landed cost means that (in this example above), I could record the actual insurance invoice from Associated Insurance and match it back to the shipments from my supplier for the product I purchased.
You can also select a cost calculation method, this will be how the landed cost estimate on the receipt will be calculated. If you have chosen to match invoices, the invoice amount will be compared against the original estimate on the receipt. The resulting difference can be revalued, if Revalue Inventory for Cost Variance is marked. Otherwise, the difference will post to the Purchase Price Variance account.
The GL account specified are used in the following manner:
  • Accrued Purchase Account: Used as the offset to the landed cost estimate on receipts, and cleared when the amount is invoiced or matched to invoice.
  • Purchase Price Variance Account: Used for the variance between invoice and receipt when matching invoices but not revaluing.
Note that no inventory or expense account is specified because the item's account will be used, since landed cost is updating the inventory cost/value of the item.

Cards>>Inventory>>Landed Cost Groups

Landed Cost Groups are used to organize landed costs in to sets that can be assigned to item/site combinations and/or to document line items like Purchase Orders and Receipts. An individual landed cost can exist in more than one landed cost group. You might choose to have landed cost groups to represent a set of landed costs for:
  • A specific location
  • Certain items
  • A type of shipping process
In my example above, I have chose to set up a landed cost group for my domestic shipments. It includes both the insurance costs and the freight costs. Now, I can assign this landed cost as a default for certain combinations of items and sites.


Cards>>Inventory>>Quantities/Sites

This step is not required. However, if appropriate, you can assign a landed cost group to a specific item/site combination in this window. Doing this will cause the landed cost group to default on the purchase order line item, where it can be changed if necessary.

More soon on the transaction side of all of this fun!



7 comments:

Mariano Gomez said...

Christina,

This is a great post! Very comprehensive. Take a look at my post on landed cost at http://dynamicsgpblogster.blogspot.com/2008/07/to-check-or-not-to-check-understanding.html

Best regards,

MG.-
Mariano Gomez, MVP
Maximum Global Business, LLC
http://www.maximumglobalbusiness.com

Zhuo Yang said...

Hi, I have a question. If the purchase, freight and insurance come from different companies, how do we setup on Dynamic GP

Christina Phillips said...

In that example, you would set up the freight and insurance each as their own landed cost. Then put them in a group together. Each landed cost can then have its own vendor, and be matched independently. But the group of both costs can be assigned to the line item.

chris said...

Christina,

Good information here. My question is it possible to assign a default Landed Cost Group to a Site ID (or at the company level so that when a new Item/Site combination is set up it automatically assigns a Landed Cost Group? We are using GP10

Thanks
Chris Goettl
Controller
Clearfield, Inc
www.clearfieldconnections.com

Christina Phillips said...

Hi Chris--

Unfortunately, I am not aware of a way to associate the landed cost with the site itself first. But, it would seem to be a pretty simple SQL job to update the records for a site with the appropriate landed cost group, or to have a customization to do that.

Take care,
Christina

JALJ said...

Hi Cristina, I found your post ver usefull and didactical. Good job!

I have this scenario to see if you can help me or direct me to someone.

Whe I import goods sometimes the cargo company consolidates different PO's in one or more shipment. At the end the cargo company issues just one invoice for the total. How can I distribuite that invoice among more than one PO's

Regards

Christina Phillips said...

Hi JALJ-

When you match the invoice to a shipment, you can match to different shipments for different POs. You are not limited to one PO in that case.

Thanks!
Christina