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.
Connect with Charlie at Google
Subscribe
If you enjoyed this article, subscribe to receive more just like it.
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,
Thanks for responding to my first question.
I have another question about figuring landed cost when there is a discount applied to the invoice.
I am new to Quickbooks and just read that when you use the pay bills feature that it allows you to take a discount if offered by the vendor. It was mentioned however that the amount recorded in the accounts payable register is for the amount of the bill and the discount gets assigned to whichever account you specify. My question is how do we assign a landed cost when there is a discount…say 2% 10 NET 30. Is the discount taken off each item so that the landed cost would include this discount or is the discount taken as say income in another account, or…??
Your insight into the matter is appreciated.
Amber
Wow, Amber, that one is above my pay grade. I’m not an accountant. Personally, I wouldn’t worry about working the discount amount into the landed cost unless it is a significant amount. But, that is just me on the practical side, I’m not sure what the best answer is from a tax or proper accounting standpoint would be. Sorry!
Charlie and Amber,
I am an accountant in a food import/export trading company in the US. We use landed cost in all of our transactions. The methodology we use is to allocate all additional freight and handling costs to the inventory items based on weight, or by case count, depending on the mix of products you are shipping/receiving. Weight and cube are the primary bases of determining freight rates (in addition to distance and speed) so these should be the primary factor to consider in costing our inventory. For example, A box of screws is rather small and light compared to a case of hammers. It doesn’t make sense to add the same amount of freight costs to the screws as you do the hammers. Multiply this across an entire freight container/trailer and you get my point.
Also, for those involved in international import/export trade, there can be MANY different charges and vendors involved in these transactions (truck, rail, steamship, port charges, warehouse/cross dock, inspections, documentation, etc.). It is definitely NOT for the faint at heart!
Hope this helps.
Pat
Amber,
In answer to your specific question about the discount, we DO include it as a net credit to our landed cost of product. That is not really a tax question so much as an internal accounting / management reporting issue. (Tax is based on the net so whether you apply the credit to the COGS [cost of goods sold] from inventory or as a direct credit to expense, the net is the same.)
Pat
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).
I tested your (Charlie) method above for an order where the item Vendor charges the Freight-In to me directly on the same invoice and it seemed to work great. I’m using Pro2011.
On a Bill, I entered the item quantities and cost on the Item tab and I entered the freight-in charge on the Expense tab, allocating it to the Shipping Cost Clearing Account.
Then I did the item value adjustment, following your procedure in detail, and it worked just fine. Am I missing something?
I know you suggested only using this method if the freight was charged separately but I don’t see why. In my case, we have some vendors who charge us the freight-in cost and other vendors we have to use a freight company (different ones – not just one) to pick up from and so we are billed separately for freight-in on those orders.
One other question I have is regarding tracking the Freight-In. By using the clearing account, which always should sum to zero, it seems that I can’t get any type of report that tells me what I spent on freight-in. (This is important to me for future cost cutting.) I can do a report on the clearing account and see all the transactions that are in there, and then manually with a calculator, I can add all the numbers from one side of the transaction, but that is pretty ridiculous to have to do.
So I was thinking that if I create a Class called “freight in” and use the class when I enter the Freight-In on the incoming Bill, but DON’T use it when I do the adjustment, then from an accounting standpoint (debits and credits to/from expense accounts, etc) it doesn’t make any difference, but from a reporting standpoint, I’ll have a way to at least view the total $ paid on Freight-In. Does that sound kosher to you? Again, am I missing something? (I’m not an accountant and I’m a QB newbie so I could definitely be overlooking something here.)
Thanks for your input.
Buck, you can mix the methods if you wish, using the expense holding account even if the bill comes with the receipt. It is just that this is a lot of extra work to do the adjusting/clearing transactions.
The advantage of that is that you do have a separate transaction/account for the freight posting. I would look into creating a “Custom Transaction Detail Report” that was set to filter the freight expense account, to see the information that you want.
Hi Charlie,
Re:”Buck, you can mix the methods if you wish, using the expense holding account even if the bill comes with the receipt. It is just that this is a lot of extra work to do the adjusting/clearing transactions. ”
But isn’t using the value adjustment the only way to 1)properly account for the landed cost of the item while maintaining the “cost” of the item at its real cost; 2)properly allocate freight cost to items so that the average cost reflects what you’re really paying (including the freight); 3)even remotely giving your self a chance in heck of figuring out what you’re paying in freight for particular items.
Otherwise, wouldn’t you be changing the “COST” of the item at each order AND you’d have no way to (even manually by looking at reports and adding up on paper) see what you paid in freight for those items?
I hope I’m not being to nit-picky. We’re trying to get QB implemented and all these details of where QB doesn’t do simple functions that any rational person would expect is really holding us up – we don’t want to start down the wrong path and have to start over or redo a bunch of work.
Thanks
I guess I didn’t make things clear in my short explanation.
You can use the expense tab on the original bill, at the time of the receipt.
You can use the inventory clearing account, and then make the adjustment to revalue the item to include that amount.
You can play with a Custom Transaction Detail report to filter for the expense adjustments, to see the values of the freight that you’ve paid. These are powerful and flexible reports that people often aren’t familiar with, and they can help a lot.
It isn’t simple. QuickBooks doesn’t manage this well as I think we can all agree. The best solution depends on many factors, such as your view of what your “cost” should include from a financial and tax viewpoint, how you want to manage costs from a managerial standpoint, how you want to track freight costs from a managerial standpoint, how long your items remain in stock, and more.
There isn’t one solution for everyone, and it is hard to lay out all of the options for a particular business without doing a careful analysis of your individual needs. Unfortunately, we often find in QuickBooks that we have to compromise, or find a workaround.
There is a 3rd party application called VISCO that integrates with QuickBooks that is designed to improve on QuickBooks landed costs function. Full disclosure…I work for this company.
Thanks for pointing that out, Tim. I hadn’t seen your product before. For my readers, Visco takes inventory entirely out of QuickBooks and uses QB just for the accounting back end. This is one of the more expensive add-on products (like Fishbowl Inventory, for example), and by keeping inventory out of QB you get away from many of the limitations. VISCO is a Gold level certified product, which is good. However, I do have some concerns about the integration. This appears (from a VERY brief look I’ve had) that there are a number of shortcomings in the integration, which are the typical ones we find in these kinds of packages. I particularly don’t like how they post sales tax – it either isn’t posted or (more likely) is lumped in with sales.
Charlie,
All of our inventory has been input as non inventory items. I’m not sure if that’s what we should be using. We manufacture decals and buy vinyl, ink and adhesive to make the decals. Most of our decals are printed as they are ordered. We do not stock our decals. Can you tell me which inventory item I should be using? Thanks so much.
Mallory, you posted the same question in the QuickBooks and Beyond blog, here’s my answer copied from there:
How to handle this depends on the version of QuickBooks you have, the kind of analysis you want out of QuickBooks, how much time you have for data management, how long your vinyl and ink supplies stay around, and some details about the decals that you are printing. Lots of issues involved, so it is hard to give a short answer in a blog comment.
For example, if you have QB Pro, you don’t have assembly items, so that limits your choices.
If your decals are “stock” items, that you repeat, you might make them inventory assembly items so that you can consume the vinyl and ink and get some cost analysis of your produced items. But that makes more work, you have to “build” the decals, which takes extra steps.
If your decals are custom made each time, with different amounts of ink/vinyl, then assemblies might not work (although if you have QB Enterprise then there are ways to make that work). You might consider using a generic Group item that you modify each time you issue an invoice. But you don’t get the cost-to-make analysis.
If your vinyl and ink are bought in large bulk quantities, and are low cost per unit, and are used up fast, those might be non-inventory items. But that changes how you do the accounting…