Landed costs refer to the supplementary expenses incurred beyond the original purchase price of inventory items. These expenses consist of costs associated with bringing the items into your inventory, including freight and shipping charges, import fees and duties, insurance, handling charges, and other relevant fees.
When deciding to use landed costs, it’s crucial to consider how it will impact essential business decisions.
- Inventory valuation: Landed costs help you determine the actual cost of your inventory, which is crucial for accurate financial reporting and profitability analysis.
- Improved pricing decisions: By understanding the total cost of your goods, you can make informed decisions about pricing your products and services.
- Better cost management: Tracking landed costs helps you identify areas where you can potentially reduce costs in your supply chain.
Ultimately, the decision to use landed costs depends on your specific business needs and resources. If the potential benefits outweigh the drawbacks, implementing a solid landed cost management system in NetSuite can significantly improve your financial reporting and cost management. Using landed costs versus simply adding the cost line item to a purchase order has distinct accounting implications, impacting inventory valuation, cost of goods sold (COGS), and profitability. Considering the significant differences between using landed costs vs. simply adding the expense line items to a purchase order is essential. These are some fundamental differences.
1. Inventory Valuation:
- Landed Costs: Including all additional costs associated with bringing the item into inventory provides a more accurate representation of the item’s actual cost. This ensures your inventory is valued appropriately, reflecting the total cost incurred.
- Adding Cost to PO: This method only reflects the initial purchase price and excludes additional costs. This can lead to understated inventory valuation, potentially overestimating gross profits.
2. Cost of Goods Sold (COGS):
- Landed Costs: When landed costs are factored in, the cost of goods sold is higher, reflecting the total cost associated with the sold item. This provides a more accurate picture of profitability.
- Adding Cost to PO: Since landed costs are not included, COGS would be lower, leading to an overstated profit. This misrepresents true profitability and can have implications for decision-making and tax calculations.
3. Profitability:
- Landed Costs: By accurately reflecting inventory valuation and COGS, landed costs provide a more accurate portrayal of profitability. This allows businesses to make informed decisions based on actual profit margins.
- Adding Cost to PO: This method overstates profitability due to the underestimation of inventory valuation and overstatement of COGS. This can lead to misleading financial statements and potentially affect critical decisions like pricing and resource allocation.
Using Landed Costs in NetSuite
To use the landed cost feature in NetSuite, a couple of setup tasks must be completed.
- Enable landed costs: The check box to enable the feature se can be found in the Enable Features>Items and Inventory subtab.
- Set up cost categories: Define categories like freight, duty, handling, etc. ” The cost categories can be set up in Accounting>Accounting Lists>Cost Category.
- Items: Enable the “Track Landed Costs” checkbox in the item entry under the Purchase and Inventory tab to value items using landed costs.
NetSuite offers the flexibility to allocate costs based on specific factors like weight, quantity, or value. However, it’s important to note that only one allocation method can be used per transaction. One of the best features of NetSuite is that it allows landed costs to be recorded at the same time as the item receipt or later on if billed separately for costs.
While NetSuite offers features for landed costs, some users may find limitations in its functionality compared to specialized landed cost management software. Choosing the appropriate approach depends on the specific needs and resources of the business. By effectively utilizing NetSuite’s landed cost features, you can gain valuable insights into your procurement costs and make smarter business decisions.