Shipping Costs and QuickBooks Inventory
What is the “cost” of an inventory item that you purchase? For many businesses we talk about the “landed cost” of the item, which can include not only the purchase cost of the item, but also the shipping cost of the item. In this article I’ll talk about a few ways to handle this in QuickBooks.
The landed cost of an item is usually considered to be the cost of the product plus any relevant logistics costs, such as transportation, warehousing, handling and so forth. The can also be called the total landed cost or net landed cost.
For my example we will receive an item called sprocket. We’ll receive 10 of them, with a unit cost of $10.00, plus a shipping fee of $10.00 (sorry about the unoriginal values here). If we were to just receive the items our item cost would be $10.00 each, but what we want for a landed cost is actually $11.00 each.
Shipping Billed with Item
If you receive a bill for an item and the shipping is included in the same bill, you can do a little math in your head to include shipping in the item cost. Let’s look at a receipt of an item, with the bill:
I received 10 at $10 each, plus a shipping fee of $10, so I simply enter a total cost of $110.00. If you have several items in the receipt but one shipping cost you have to allocate the shipping cost to each of the received items yourself.
Shipping Billed Separately
What happens if you get the shipping bill later? Perhaps you are paying a separate company for the shipping fee so it doesn’t come in the bill for the items themselves. There are two ways to handle this.
- Go back to the original item receipt and adjust the amount to reflect the shipping charge. This works if the shipping charge comes from the same company, and you don’t mind adjusting the original bill to include these charges. This is a simple approach, but generally not the best way to handle things.
- Create a special shipping clearing expense account to use when entering the bill, and then doing an inventory adjustment. This will deal with most situations properly, but it does take extra work.
A clearing account is one that you set up in your chart of accounts to help with the process of moving a value from one place to another. Generally the idea is you create a place to hold the value, and then you adjust it away so that the clearing account doesn’t have any value left behind.
In your chart of accounts create a new expense account and call it Shipping Cost Clearing Expense.
You will receive the item as before, but since we either don’t know the shipping cost or the shipping charge is from another vendor, you will only enter the actual purchase cost of the items. In this case, we enter $100.00.
As you can see below, we have an average cost of $10.00 per item (in this case, because we didn’t have any on hand prior to this transaction).
Later we receive the shipping bill, and we will enter the cost of the shipping ($10.00 in our example). They key here is to use the clearing expense account, rather than your normal shipping expense account. If you stop now, you have expensed your shipping, you have not allocated the cost to your inventory.
Now you are going to enter an inventory value adjustment to move the shipping cost out of the holding account and into inventory. Do not change the quantity. Make sure that you:
- Select the shipping cost clearing account for the adjustment account.
- Check the value adjustment box.
- Enter a new value amount that is the total of the current value plus the shipping charge.
This moves the cost from the holding account into your inventory asset account. If we look at your item you will see that the average cost is now $11.00, which was our target. PLEASE NOTE that if you have existing items, or multiple receipts, you won’t see this as clearly. BUT the process will still work correctly if you follow the steps above.
If we look at a QuickReport for the clearing account we see that the net balance is zero – which is a good check to see that all of our inventory adjustments have been entered for these kinds of situations.
Hope that helps!
Category: Inventory, Manufacturing
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70′s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the QuickBooks and Beyond blog, as well as his California Wildflower Hikes blog.
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Hi,
Using your example of purchasing all like items it seems quite easy to assign a value to each item by simply dividing the shipping evenly between each like item but when the items are all different how do you assign a landed cost to each? Would you simply divide the shipping by the total # of item’s purchased or by some other means.
As an example, say I have an invoice that looks something like this:
Item A 50 @.36 = 18.00
Item B 5 @8.75 = 43.75
Item C 10 @2.10 = 21.00
Item D 2 @14.90 = 29.80
Item F 4 @.52 = 2.08
Item G 3 @38.32 = 114.96
Total = 229.59
Shipping cost = 22.50
In this example there are a total of 74 items that were purchased. Each item has a different cost and weight, etc. How would you go about assigning a landed value to these items?
Thanks in advance for your help.
Amber, apologies for not getting back to you sooner. I was out of the country for a week – and our SPAM filter set your comment aside because of all the @ signs, it was taking them as email addresses. I edited some spaces in there to get it to appear.
How you do this is up to you aren your accounting advisor. I don’t know what the official answer is, from a tax standpoint (as I understand it, the IRS wants the landed cost, but I don’t know if they specify how you do that).
From a practical standpoint, not as a CPA or tax advisor, I would think that you could just divide the amount up equally if that saves you a lot of time. The more detailed you are with proportionally dividing it the more accurate your valuations are, but that could take a lot of work. It depends on how accurate you want to be and how much time you can afford. But, check with your accounting advisor…
Hi Charlie,
I know this is an old topic but I’m hoping you’re still monitoring it. I’m blown away by the fact that after buying QB Pro and then QB Premier, I still have to jump though all those hoops to properly allocate “other” inventory-related costs to my items, such as freight, duty, etc. If I just put freight as an expense then I don’t have very good insight into the ACTUAL cost of my products for pricing purposes, but if I just roll the additional costs into the item cost without breaking it out, I have no idea what portion of my cost is freight, etc – that I might be able to negotiate, etc.
What really surprises me, after reading your blog and your comments (and Rustler’s comments) on the Intuit community, is that neither of you mentioned that Intuit DOES know how to do this – it’s part of QuickBooks POS. Check out the following help file:
http://support.quickbooks.intuit.com/support/pages/inproducthelp/POS/POSv6_Basic/qbpos_receiving/voucher_spreadcosts.htm
Of course, POS doesn’t do half of the other things I need done (like assemblies, etc) AND it costs $1500!!!
I can’t really describe how angry I am right now after realizing that the most used small business accounting software is not at all what it’s cracked up to be and doesn’t provide some of the most basic functions one would expect from an accounting package.
Buck, both Rustler and I can list many, many things that we call “head scratchers” that Intuit doesn’t do in QuickBooks. Actually, Rustler may use a different term to describe it but I won’t print that.
POS is a very different product, written (originally) by different people, and it does things very differently.
There is no reason why Intuit can’t deal with this better other than they haven’t taken the time, they think other things are more important, and (in my opinion) they tend to not do things that don’t improve the revenue that they might generate.
Best I can say is to leave them comments in the “feedback” portion of the Help Menu – if enough people complain, they may pay attention. I know of a number of improvements that have been based on that kind of feedback.
In most of my cases, I pay my vendor for shipping, not a 3rd party freight company. But it seems like I can still use this method to allocate the freight cost to the average cost of the inventory items. Am I mistaken?
At the end you suggest using a QuickReport to check the net balance of the clearing account is zero. That worked great. But do you have a suggestion for how I can see what I’m spending on incoming freight in my situation? It think it would be a valuable number to know.
Thanks
Jennie, it is difficult to have a process that may cover all of the bases.
It would depend on how you get the bills and how you want things to show up on the billing side. Using my clearing account example, the “3rd party freight company” could still be the same vendor that you purchase the items from. So you could run this through a clearing account, but just enter two bills for the same vendor (one for the items, one for the freight).