Landed Cost Tracking (LCT) provides visibility of imported goods through shipment tracking and enables greater control of all associated costs, resulting in accurate landed costs. It enables you to track shipments of imported goods, monitor the progress and estimated arrival times of shipments, and establish a reliable estimate of the overall cost of imported goods. Furthermore, it aids the calculation of a more accurate actual cost at which to receive the goods and provides an actual cost comparison to the various estimates made during the procurement cycle.
The Landed Cost functionality helps you accurately capture the actual cost of inventory receipts. It allows you to add the costs of freight, insurance, duties, etc to the cost of the received inventory items. It will also make it easy to add the vendors’ invoices for these costs into Accounts Payable, and associate them with the receipts. You can select to also have your inventory costs adjusted to include the additional costs.
Every time this issue comes up, I have to figure it out, again; how do you match a landed cost vendor’s invoice to the receipt.
WHY LANDED COST?
With transaction database software, we know profit margins by item, because the costing of an individual item is tracked from receipt to shipment. This tracking capability enhances your view of sales. For example, you can see what your most profitable item and/or most profitable customer is. However, this knowledge is only as good as its accuracy (especially as it relates to the costing of the items sold) . For businesses that import goods, costs include not only what was paid for the item, but also what was paid to “land” the item in your warehouse. These ‘getting-it-into-the-warehouse’ costs can not only significantly add to the purchase cost, they can also vary greatly from part to part (depending on weight and volume) or from receipt to receipt (depending on method of shipment). The Landed Cost functionality of inventory software can distribute these freight costs to the received items, which then provides the true cost of the inventory sitting in your warehouse. Thus the landed cost functionality refines the usual practice of adding a freight percentage to the material cost of goods (based on historical gross numbers.)
CONSIDERATIONS OF LANDED COST
The accounting people in the company need to be aware of a few things:
The journal entry for Landed Cost “moves” the expense from the Cost of Goods (P&L sheet) to the Inventory Asset (balance sheet), thereby increasing the Asset Value of the company (company is worth more!) while decreasing expenses (the company is temporarily more profitable!).
The shipping Cost of Goods is not recognized until the items are sold.
Local freight is generally expensed upon receipt of the bill and not included in the Landed Cost (although this is a decision for Accounting to make and could be influenced by the proportional cost of the part and the freight).
THE BENEFITS OF LANDED COST TRACKING
- Identification of all cost elements associated with imported goods for better estimates of landed costs
- Estimated landed cost for each product through accurate cost apportionment based on volume, value, quantity, etc.
- Tracking of shipment arrival dates
- Pre-costing of shipments for streamlined receipting
- Goods Received Note (GRN) system to trace element costs for accurate invoice matching
- Multiple tariff codes
- Automatic update of expected arrival date when shipping date is revised
- Archiving of completed shipments and associated costs
For any company that imports goods from overseas, whether to use them in manufacturing a bill of materials (BOM) or distributing them directly, landed costing is essential in determining the real cost of parts in the warehouse. Without this real cost, true profit margins per part are near impossible to know.