Manage Landed Costs through Item Charges

Landed costs are all the expenses incurred by a company to make its products available to its buyers. In Business Central, landed costs are managed through item charges. In this post, I will cover how to register and manage these costs for sales and purchases.

What are landed costs?

Landed costs typically include manufacturing, shipping, customs duties and handling expenses incurred to bring a product to its final destination; this can be the company's warehouse or a customer destination in case of drop shipments.

Companies that trade products must manage landed costs correctly for various reasons:

1. Accurate inventory valuation

2. Correct product pricing

3. Accurate calculation of gross margin

4. Manage logistics costs

Landed costs can be complex in international supply chains. Unfortunately, most accounting software solutions do not include landed costs as a specific feature. In Business Central, there is a functionality designed to allocate direct costs of purchasing and sales to inventory transactions, and, amongst many other uses, it can help manage landed costs. This functionality is called Item Charges.

What is an Item Charge?

Item charges are used in BC to allocate direct costs to purchases and sales of goods, and it's a type of document line we can use when we create purchase or sales documents.

Why use Item Charges?

On purchases, item charges can be used to post landed costs that increase the value of your inventory and are passed to the COGS as itemized costs. On sales, an item charge is a non-inventoriable cost allocated to the sale.

How does it work?

Item charges are document lines in BC that can be used in purchases, sales, and invoices. Unlike a line of type G/L, the item charge must be applied to purchase, sales or transfer transactions (receipts or shipments).

Setup

The setup of the item charge will ensure posting the cost amount to the correct nominal codes in a company's chart of accounts.

1. Create a dedicated Freight Cost Item Charge code.

The first step is to create an item charge for shipping and receipts. These item charges cannot be the same. Therefore, you need one item charge for purchase freight and one for sales freight.

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2. Create a dedicated Gen. Prod. Posting Group for shipping costs and one for landed costs.

Unfortunately, in the Cronus database, all item charges are assigned to the same posting group. You must not use this setup.

This field is used when you post- purchase transactions. Therefore, when you post a purchase invoice using the item charge with that posting group, the posting will result in two entries:s::ock differ from the costs you pay for shipping goods to your customers. Therefore, different item charges for other purposes must have a separate posting group below; you can see the setup in my sandbox.

­3. Set up the purchase accounts for shipping costs.

The accounts to map in the general posting setup should be COGS accounts. However, the account for sales shipments should be a non-material cost. Typically, the finance manager or director should decide which nominal code to use. Ensure the code is set up against the Purchase field on the General Posting Setup page.

This field is used when you post purchase transactions. Therefore, when you post a purchase invoice using the item charge with that posting group, the posting will result in two entries:

Credit Accounts Payables: The A/P account is set up against the Vendor Posting group of the freight forwarder for which you post the invoice.

Debit Freight Cost: The freight cost account is the nominal code in the Purchase field of the Gen. Posting Setup where Gen. Bus. Posting group comes from the vendor and the Gen. Prod. Posting Group is the new code created for shipping charges.

­4. Set up the purchase accounts for landed costs.

This is where things might get a bit complicated: There are at least two fields that you need to set up correctly so that your landed costs will post to the correct ledger.

The first field is the Purchase account in the Gen. Posting Setup. This field should point to an income statement account, typically a COGS account. This account will balance the AP credit entry when you post the invoice.

The second field is the Direct Cost applied account. This field should be set up to the same account in the purchase. However, it can be a different COGS account if you want to see the credit and debit going to separate accounts. That's it. An item charge used on purchases only needs these two main fields to post correctly. You might wonder why I did not mention any inventory nominal code above. After all, didn't I say that an item charge "increases the value of your inventory"? Yes, this is where things get interesting.

There is an inventory transaction when we use item charges on purchases. However, the inventory nominal code used for freight costs does not depend on the item charge. The inventory nominal code is where the product purchased cost will post, depending on the Inventory Posting Group set up on the item card and the location where we receive the item. This is why we cannot post an item charge line if there is no application to a material transaction, IE, a purchase receipt. Let's do an example: On January 1st we purchase goods for £1,000.00 We have the following transactions (I did not include VAT to make it simpler) Dr. Purchase £1,000.00 Gen. Posting Setup item and vendor Cr. A/P £1,000.00 Vendor posting group (Vendor Card only) Dr. Inventory £1,000.00 Inventory Posting group (Item Card only) Cr. Direct Costs Applied £1,000.00 Gen. Posting Setup item and vendor On January 3rd, we post a freight invoice for £100.00, and we apply the cost to the purchase receipt of January 1st. Dr. Purchase £100.00 Gen. Posting Setup item charge and "freight" vendor Cr. A/P £100,00 Vendor posting group (Freight Vendor Card only) Dr. Inventory £100.00 Inventory Posting group (Item Card only. This value is taken from the posted purchase receipt of the goods applied to the item charge) Cr. Direct Costs Applied £100.00 Gen. Posting Setup item charge and freight vendor. In the picture below, you can see the transactions above in T accounting.

The setup is complete. Now we can look at posting a freight invoice for shipping costs.

Posting

1. Create a purchase invoice and use the item charge in the line

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­2. Open the Item Charge assignment action in the lines menu under Related Information, and find the option Item Charge Assignment. On the next page, under Function, find Get Sales Shipment Lines if you are posting sales shipment costs. Choose Get Receipt Lines if you are posting landed costs.

­3. Select one or more shipments/ receipt lines to which the charge applies and apply the charge. Here you can decide how to spread the charge. For example, you can assign shipping costs depending on weight or volume.

­4. Post the invoice. After the invoice gets posted, you will see that the transactions' accounting entries are those I have described above. A/P, VAT and shipping costs.

Cost Analysis

From an accounting point of view, your purchase invoice is a simple transaction that goes into your P&L.

However, the interesting part of the item charge is that the allocated costs are passed to the sales transaction, as shown in the picture below.

­Likewise, the landed costs­ posted for a receipt generate an additional inventory ledger with no quantity and an inventoriable value.

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­The benefit of using item charges instead of posting freight costs through a journal is about profitability reports. Any report you run that looks at the profitability over time of that item or customer will now include non-inventoriable costs.

Regards,

Alfredo Iorio.

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