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!
Dick Kusleika | Mar 10, 2009 | Reply
Great post. I handle shipping similar to the way I do use tax. On the original invoice I gross up the item cost for shipping, then add a negative line (on the expenses tab) to back it back out. That line goes to the same GL account as the subsequent shipping invoice.
It has the unfortunate side effect of having two bill lines when the customer only actually billed one line. It’s a preference, though. I think they’re both good methods. Whatever gets the right answer, right?
Donna Hawkins | Mar 11, 2009 | Reply
Hi Charlie,
On a new subject: You are probably aware of the new COBRA requirements for employers. We have to pay 65% of the premium, which is declared on the NEW Federal form 941 (quarterly payroll report), and REQUIRED first Qtr 2009.
My question is: Is Quickbooks going to have the new form available, and how do we enter the info to properly populate the form 941?
Thanks for all your great info – Donna
Charlie | Mar 11, 2009 | Reply
Hi, Donna, hope all is well up in Woodland: Blog discussions like this aren’t a good way to talk about off topic subjects. At this time I don’t have an answer for you as I don’t usually work with Payroll. You should try contacting Intuit payroll services about this…
Ray Leventhal | Mar 27, 2009 | Reply
Charlie,
Excellent info, as usual. In the scenario below, how do we get our PO to match the invoice so that the invoice can be paid?
1) Issue PO for 10 Sprockets at $1/ea
2) Receive goods in total
3) Receive Invoice for $10 goods + $10 freight
4) Pull up PO to pay, value on PO is only $10.
I’m not in accounting…just was asked that question after showing your solution for costing goods to include freight.
Thanks in advance,
-Ray
PS CCRQBBOM is so very useful…thank you for this great product!
Charlie | Mar 27, 2009 | Reply
Ray: Two easy ways, depending on how you are treating your shipping costs.
If you are expensing them, then on the receipt transaction you selec the “Expenses” tab (your items are probably on the “Items” tab) and add the expense to the appropriate account.
If you are doing the “landed cost” approach I discuss above – on the item tab you just change the “amount” value to be the total amount. If it is one line at $10 of goods, just change it to $20. If you have several lines, then you would have to manually divide the amount out amongst the detail lines, adjusting the amount of each.
I’m glad that you like CCRQBOM, the April release (if I can quit writing blog postings and get the documentation finished) will add a LOT of capability. Subscribe to the product blog and you will be notified when the new release is ready.
shiraj | May 11, 2009 | Reply
Charlie,
Using Ray Leventhal’s question, the vendor balance will show $.20/- whereas only $.10 is payable to the vendor. What should he do in this case. Maybe dick’s answer will be more appropriate.
thanks
Charlie | May 11, 2009 | Reply
Shiraj: Ray’s question had him receiving the item but getting the bill later. The bill was for $20.00, and if you make the adjustments like I suggested, the amount due is $20.00. That is the correct amount.
Chris | May 21, 2009 | Reply
Hi,
I understand the landed cost adjustment. I have set up an account “Customs Clearance” which I have paid as a cheque as COGS and I understand about making the adjustment on price. Can I do the adjustment on that “Customs clearance” account? Or should the customs clearance been set up as expense instead of COGS?
Thanks
Charlie | May 21, 2009 | Reply
Chris, that is a question for your accountant. In my view (not being an accountant), the big difference between expense and COGS is where it shows in your financial statements – “above the fold” or below. If you do what I’m saying, it doesn’t matter in the long run, because you are “clearing” the account – posting a value there and then clearing it out with an adjustment, so if you have all your bills in the value should be zero. Hope that makes some sense.
João Suplementos | Jun 11, 2009 | Reply
Hi,
My problem here is the other way around, I’ve been Learning QB on my own…very badly lol, but I kind of sorted things out except for one thing, when I create and Invoice, how do I had shipping costs to it? I do not wish to have my shipping costs on the product net price (the landed product stuff), I wish to have a specific product or expense in the Invoice to represent shipping costs. Is this possible ?
Regards
João S.
Charlie | Jun 11, 2009 | Reply
João: This article is talking about the cost of shipping that you are paying to RECEIVE an item. You are talking about the cost of shipping to SEND an item to someone. That is a bit different. Normally your customer is bearing the cost of that (unless you decide to cover it). If you are charging shipping costs to your customer, create a “shipping” item in the item list, perhaps as an “Other Charge” item, and add it to the invoice as a separate line.
NOOR | Jun 19, 2009 | Reply
HOW TO ADD IMPORT DUTY, FREIGHT ETC TO COST,IF BOUGHT MULTIPLE ITEMS ON ONE VENDORE INVOICE. IF ITEM A 50 PCS @ 5.00, B 10 PCS @7.00 AND C 15 PCS @20.00.ON THAT FREIGHT PAID 500.00 DUTY 200.00 DEMRAGE 100.00 (ALL TO DIFFERENT VENDORS)
Charlie | Jun 23, 2009 | Reply
Noor, if it is in one invoice, you have to manually determine what percentage of the costs go to each item. This is not always a simple task.
Dan | Jul 11, 2009 | Reply
Hi Charlie,
In some cases we don’t get the invoice for the items received until after we have closed a month at which time we find out there was shipping added.
Is there a way to have the shipping update inventory in the current period and not go back to the previous period to make the adjustment?
Thanks,
Dan
Charlie | Jul 13, 2009 | Reply
Dan, yes and no. It is a bit complicated to spell out in a comment. There are a number of different ways to handle it, but you should talk to your tax accountant. You could enter the bill at the time that you receive the item with your expected cost, and then do inventory value adjustments when you actually get the shipping bill. Rather than change the unit cost of the item back at the time it was received, you can just post the cost to inventory asset on the date that the invoice is received (current period). But that isn’t a “tax” person’s answer. This puts that shipping cost in inventory, so the COGS when you sell the item is put into the current period. Hope that makes some sense…
Ramis | Aug 31, 2009 | Reply
Dear Charlie,
Your approach is a good approach that I have used. However, I have a problem when the shipping/clearing bill comes in a different accounting period. I received the goods in 2008 and I received the shipment/clearing invoice in 2009. When I do the adjustment on my inventory, I had to do it with a 2008 date, since by the time my shipping invoice came through, the products where no longer in my inventory (they had been sold).
The problem comes at year end, when in 2008, the Clearing Account shows a negative in my income statement and will show a positive in the 2009 Income statement. How would you deal with this issue. Would you do make an adjustment in the General Journal in order to “Zero” the balance of the Clearing Account, against “Retained Earnings”?
What would be the optimal solution?
Thanks
Charlie | Sep 1, 2009 | Reply
Ramis: As I’m not a CPA I can’t say what would be best from an accounting standpoint. From the standpoint of your year end financials, you could do a journal adjustment at year end and then reverse it in the next year, which would be a fairly simple solution. Have you talked to your accountant about this? Unfortunately, it is a bit of a hassle no matter what approach you take.
Kevin Kimball | Sep 2, 2009 | Reply
Charlie,
Thank you for your post on handling the application of shipping cost to the inventory account. I am currently right in the middle of creating a QuickBooks video tutorial for an introductory QuickBooks class at BYU-Hawaii in which students will be required to record a purchase of inventory that includes additional shipping costs.
Your solution (landed cost) was right on the money and will help me improve the video I created at 11 pm last night.
I guess I better start my revision. All the best.
Kevin Kimball
Charlie | Sep 2, 2009 | Reply
Kevin: Great! I’d love to see the video…
Jim B. | Sep 7, 2009 | Reply
Charlie,
Thank you for this site and your very helpful advise and direction. Although I have tried to follow this post to solve my clients issue unsuccessfully, well, maybe if I stated it directly you could respond in kind. They are adding freight charges on their PO’s and they are set up as Freight being an inventory item posting to Purchase COGS and Sales income account as well as a other current asset called “Inventory Asset”. When we run the P&L it appears that the freight has been severely over inflated and terfore their COGS completely incorrect. Have you seen this type of error before and if so, can you advise how to correct it from the past as well as going forward? Thanks so much for your time!
Charlie | Sep 7, 2009 | Reply
Jim, I can’t say what specifically to do without seeing the file itself. However, having “freight” as an “inventory part” item is, as far as I’ve seen, very unusual. Why would you do this? You aren’t reselling that “freight” item. It won’t put that cost into the cost of the received item. If you receive that item the cost goes into the inventory asset account, and it would stay there. The COGS account is only accessed if you sell “freight” on an invoice. Very strange…
Joe | Sep 19, 2009 | Reply
I understand the way you are showing how to deal with the shippingt, taxes and other expenses to add to the cost of the item. But I want to know how would I know, after I have cleared this accounts, which porcentage of the cost of the item, is from shipping, which is from taxes. And I still don´t understand how to deal with making the value adjustment when you already have the same items in inventory which were bought at a different cost.
Thanks for your posts.
Charlie | Sep 20, 2009 | Reply
Why do you need to know what percentage of a particular item’s cost is shippig and what is taxes?
As far as value adjustment, read my inventory adjustment article.
Navid Shariati | Sep 30, 2009 | Reply
Hello Charlie
I have decided to use the “landed cost” approach when entering my PO’s. How should i enter reimbursable items?
For example, i buy 40 bags of x and 40 bags of z, shipping charge is $10 and 2 pallets at $16 each(the bags are shipped on pallets). I will be reimbursed $13 upon return of each pallet, leaving me a cost of $3 per pallet. Should i include the cost of each pallet($3)into the inventory items the same way i would do for the shipping charge? How would the amount on my PO match the bill if i pay $16 first?
Thank you so much!
Navid Shariati
Laura D | Sep 30, 2009 | Reply
Navid – here is a thought:
If you put the $3.00 into the cost of the item, as you suggested, create another ‘other charge type’ item for the “Pallet deposit” and point it to a current asset account.
Then, when you get the bill, enter the inventory item amounts, including the sh/h and pallet fee ($3). Using your new item, add the pallet deposit($13).
Then, when you are credited back the $13, use the item to record that, as a minus on the bill (or a sales receipt, if they give you a separate check).
On your books, you should always have a current asset balance of the amount owed to you when you return the pallets. ($13 x # pallets in your possesion)
Try this and let us know if it will work for you.
Charlie | Sep 30, 2009 | Reply
Thank you, Laura.
Navid, Laura is an expert in QuickBooks and accounting, and I asked her if she would respond (as I’m not a bookkeeper or accountant).
Kathleen | Oct 20, 2009 | Reply
Charlie,
Thank you for your landed cost example. However, I see that the item “cost” has changed to $11.00 as well as the “average cost”. Is this what you want? Wouldn’t your next purchase order use this new cost and might be overlooked? I am a new user using QB Premier 2010 and have encountered this issue.
Charlie | Oct 20, 2009 | Reply
Kathleen – sometimes when I’m working with my sample data, some things get changed that are outside of the example. That may be due to my having to run through several scenarios at one time. If you follow my example step by step the “cost” would not change, just the “average cost”. You DO want the average cost to change. The “cost” itself won’t change when doing the value adjustment.
Kathleen | Oct 21, 2009 | Reply
Thank you for your quick response and patience. Still trying to figure out how Quickbooks works and really appreciate this web site. I am learning lots of things to include in my setup and lots of things to avoid. Am migrating from another software system and trying to be open minded about the differences. Beginning to appreciate Quickbooks’ flexibility and power.
Nancy | Nov 19, 2009 | Reply
Hello Charlie,
I know I’m not in the right category but I didn’t see anything for general questions. I want to know if 2010 M&W QB supports 2 shipping locations. We sell wholesale landscape lumber and each “yard” has most of our inventory items but one yard also manufactures chain link fence. If QB is NOT happy with 2 locations, is there some add-on software that would support it?
Thanks for your help – this site is SO informative!
Nancy
Charlie | Nov 20, 2009 | Reply
Nancy, glad you like the site. This isn’t really an “open forum” kind of site, where people can ask questions. I write articles on topics of interest (that I know something about). The Intuit Community forums are a good place to ask general questions (http://community.intuit.com/quickbooks)
QB doesn’t really handle multiple locations. The primary issue is keeping inventory separate. The best you can do is to create part names that divide by location – so instead of having “pine board” you would have “Yard 1 Pine Board” and “Yard 2 Pine Board” or some variation of that approach. It is a pain.
You might look at Fishbowl Inventory, it allows for multiple locations I believe, but that is expensive. It keeps the inventory outside of QuickBooks (I’m not endorsing it, as I don’t use it so I am not familiar with it in detail).
Nancy | Nov 20, 2009 | Reply
Thanks! Appreciate your time and will wander back to the “Community” but glad I found you and your great site!
Nancy
Brittany | Nov 22, 2009 | Reply
Hi Charlie,
GREAT post and blog, thanks! I have a quick question involving Scenario #1, wherein shipping is billed along w/ the cost of the inventory items. I completely get the concept, but what if we’re not working w/ even numbers, i.e, $10 for item, $1 for shipping?
We buy our inventory from a Canadian company, so we also have to spread foreign exchange rate loss/gain across our items, along with the shipping. This is perfect in theory, except for rounding…
For instance, with one invoice, I’m off by $0.04 now after spreading the shipping and FEX difference across each item. I haven’t started using this method but I’m all on board to do so, except for this one niggling question I have. How do I deal with these small amounts by which I’m off?
I can play around with the numbers and add one or two more decimal places to eventually get it all to come to the right total charged amount, but it takes a lot of time. Any suggestions or is that pretty much just how it goes?
Again, thanks for this great resource — I’ve learned alot here!
Charlie | Nov 23, 2009 | Reply
Brittany, there are a number of ways to deal with it, but you should talk to your accountant for guidance (and please note, I’m not an accountant).
Personally, I want to avoid things that take a lot of time. And worrying about $0.04 isn’t very productive. I would set up an expense account (or whatever your accountant suggests) and just post the rounding error values to that account. The amount isn’t significant, and since the dispersion of these values across multiple items is a guesstimate anyways, I don’t see that it is any less accurate to do this. Often when dealing with multiple currencies you have to set up an account to handle all kinds of variances due to exchange rates, and this would be a similar concept.
Again, though, I’m not an accountant so you should as for professional guidance on how to handle that in your situation.
Sam | Dec 21, 2009 | Reply
great website. thanks for the help!
LOU | Jan 2, 2010 | Reply
if we move the shipping cost to the cost of the item, from $10 to $11….. Will that change the cost of the 10 units for the next PO that is created…….since our vendor price is still $10 total for 10 units..should i send him a PO showing the $11 for the 10 units…what will he think…..and perhaps the shipping cost changes, too……..can the shipping cost be capture some other way without having to make inventory value adjustments……..you might have 10 to 20 inventory items on a PO……….Lou
LOU | Jan 2, 2010 | Reply
IN my last comment about shipping….it should have been $10 per unit, not $10 for 10 units or $11 per unit, not 10 units…the question is still the same….
Will that change the cost per unit for the next PO that is created…..will be $11 ? or
should i send him a PO showing the $11 per unit…what will he think…..and perhaps the shipping cost changes, too……..you might have 10 to 20 inventory items on a PO….could be tedious work…….can the shipping cost be capture some other way without having to make inventory value adjustments………….……….Lou
Charlie | Jan 2, 2010 | Reply
Lou: You always have the option of expensing the shipping cost (I’ll not argue the “accounting” aspects of this). If you want to include the shipping costs in the cost of the item, you have to do some sort of transaction such as an inventory adjustment, or changing the received unit cost.
But, please note, that this changes the “average cost” of the item. That is different than the “cost” field. When you add the item to a new PO, the default “cost” that shows comes from the “cost” field, not the “avg cost” field. So if you don’t change “cost” in the item record, you don’t affect the future purchases.
When you first start using PO’s and receipts, if you receive an item at a different unit cost, a popup window appears that says “you have changed the ‘cost’ for” this item. It asks you if you want to update the item with the new cost. You can say yes, or no. Say no to leave it unchanged. Note also that this has a check box that asks you if you want to suppress this question in the future. If you check this, then the answer that you give becomes the “default” answer.
So if you are changing your unit costs and that change sticks in the item “cost” field, you have answered that question “yes”. If you want to change that default answer, you have to reset the “one time messages”. See this article on how to do that: http://qbfaq.ccrsoftware.info/2009/10/26/how-do-i-get-those-quickbooks-warnings-back/
Let me know if that is clear…
Nic | Jan 15, 2010 | Reply
We sometimes receive hundreds of items on a PO. As for freight charges we do divide the freight as a percentage across all items on the PO. How can Quick Books do this for me so I dont have to add the percentage to each individual item manually.
Charlie | Jan 15, 2010 | Reply
Nic, I don’t know of a way to get QB to do that itself. A custom program could be written to do this, but I don’t know of a better option.
HRS | Feb 17, 2010 | Reply
Hi Sir,
I am appointed a new accountant here. They are not adjusting inventory prior. From now on i want to adjust inventory cost which included shipping cost your advise works only when we dont have any quantity on hand. is there any way to adjust shipping cost when we already have quantity on hand but which only effect the new items?
thanks
Charlie | Feb 17, 2010 | Reply
HRS – this works perfectly well if you already have a quantity on hand. Prior to including the shipping in the cost of the items, your shipping cost most likely was being expensed. If you start using these methods, from this point on your shipping cost is being built into the cost of the items. Most likely this will bring the average cost higher. But it is still accurate. You have to figure out what you are going to do with the shipping costs that you have expensed prior to this (that is something to discuss with your financial advisor). However, it is still accurate…
Mike T | Feb 19, 2010 | Reply
Here’s another way to do the same thing:
1)Before receiving the PO, determine the shipping cost of the entire PO. Add up how many total inventory units are on the PO. Divide that number into the shipping cost-Example: Shipping cost $1000, # of units on the PO, 10,000=shipping cost per inventory unit=$.10/each.
Then create a new inventory part code for the $.10/shipping cost per unit. Put 10,000 units of this code on the PO.
Make a new inventory assembly code for the inventory item that includes the inventory part item code and the shipping cost item code. Receive the PO.
Now build the inventory assembly item, marrying the inventory part and the shipping cost. Your inventory assembly item now has the landed cost. If this inventory assembly item is part of other finished goods assemblies, you will have to put this new landed costed code into those.
This is what we have been doing, but it sounds like there ought to be an easier way!!!
Charlie | Feb 19, 2010 | Reply
Interesting, Mike, thanks for your comment. Sounds like a lot of work to do all the “builds”, and that doubles the number of items in your item list. ANd you have to make sure that you sell the assembly, not the “raw material” version of the same item.
Mike T | Feb 19, 2010 | Reply
Charlie,
You’re right, it IS lots of work, but it helps us properly allocate the freight costs over the time it takes to use or sell the inventory.
We actually don’t sell these components, only use them to manufacture the finished goods which are then sold. The raw material code should have a zero quantity once the build is done.
I’ve always wondered why the landed cost concept is so difficult for Quickbooks to handle. It would make sense to me if a freight cost factor could be included as part of setting up an inventory item. That’s how we used to do it when I worked for a large wholesale distributor.