Landed Costing: Including Costs in Item Valuation

An Item's landed cost includes all costs incurred during the process of moving it from the supplier's location to receiving it into the purchaser's inventory. Aside from the cost of the Item itself, this may include shipping or freight charges, insurance, fees to clear customs, duties, taxes, and storage costs. From an accounting perspective, an Item's valuation may include valid landed costs, and therefore reflect the true cost of that Item on the company's financial statements. A qualified accountant can help determine whether or not a cost should affect Item valuation.

ERPNext includes two mechanisms to account for landed costs in an Item's valuation. The applied method will depend on a several factors, including when a company knows about the costs in relation to receiving the Item, if it owes the costs to the Item's supplier or a third party, and the company's accounting workflow.

Method 1: Add Landed Costs in the Purchase Document Taxes Table

If the company knows landed costs at the time it's recording items in inventory (via a Purchase Receipt or a Purchase Invoice with "Update Stock" selected), it can indicate the costs should be included in Item valuation via the "Purchase Taxes and Charges" table. There is a field in each row called Consider Tax or Charge for that has two options to indicate if a charge should be included in Item valuation.

To do this, add a row for the landed cost and enter appropriate values in the required fields. Next, click on the "Edit" button to pull up the Editing Row modal. The Consider Tax or Charge for dropdown will show the default category selection of "Total", which, not surprisingly, only includes the amount in the document total. However, there are two other options - "Valuation and Total" and "Valuation" for landed costs. Both options allocate the row's cost proportionally to the inventory or asset Items in the "Items" table based on their relative "Amounts". The system includes the distributed portion in the Item's incoming valuation rate. The difference between the two options is whether the document's total includes the landed cost amount (select "Valuation and Total" - useful when the charges are owed to the same party supplying the Items) or not (select "Valuation" - useful when the charges are owed to a third party).

The main benefit of using this method is its convenience, however, it does have drawbacks. There's a lack of flexibility to change how ERPNext distributes the landed costs or to exclude Items. The underlying calculation uses "Amount" for the distribution ratio without a built-in option to change this to use quantity or a custom allocation. It also allocates costs to all inventory and asset Items in the Items table without the ability to exclude any of them. Fortunately, the method to create a separate Landed Cost Voucher document helps navigate around these issues.

The following table demonstrates the entries when the landed costs are added directly into a Purchase Receipt. The example assumes a company receives 80 of an Item that it purchased for $1.25 each (total of $100.00) and is charged $8.00 for shipping by the same supplier. The company uses "Expenses Included In Valuation" as the account head in the "Taxes and Charges" table for shipping costs. All currency amounts are in US dollars.

Method 2: Create a Landed Cost Voucher Document Linking to Purchase Documents

ERPNext provides a Landed Cost Voucher document for the express purpose of adding landed costs into the valuation for Items already received and on the books. For simplicity, this discussion will focus on Items in inventory, although the document may be used to update fixed asset valuations as well.

This method is useful in the following scenarios:

• The landed cost invoice arrives after items are received in inventory and recorded on the Stock Ledger
• Landed costs are due to a different party other than the supplier of the items
• There are multiple purchase documents in the system for all the items the landed costs should apply to (for example, an order received in multiple parts, each with its own Purchase Receipt in ERPNext)
• The method to distribute the landed costs to Item valuation should be in a way other than by an Item's relative "Amount"

The Landed Cost Voucher document may be found in the Stock module. Landed Cost Vouchers link to Purchase Receipts and Purchase Invoices, but Purchase Invoices must have the "Update Stock" option selected. Once all relevant documents are in place, press the "Get Items from Purchase Receipts" button to load the items into the Landed Cost Voucher. Individual Items may be removed as needed, but the system will throw an error for Items added manually to this table - they must link to a Purchase Receipt or Purchase Invoice.

In the "Applicable Charges" section, add rows for all landed costs, including the expense account (ERPNext uses this for General Ledger entries), a description, and the amount. Finally, there are three options for how to distribute the charges to the items: by amount ("Amount"), by quantity ("Qty"), or manually ("Distribute Manually"). Note that only inventory or asset Items can have costs distributed to them. The first two options automatically calculate the distribution. To use "Distribute Manually", click the "Edit" button in each row in the "Items" table and enter an amount in the "Applicable Charges" field. Save and submit the document.

Under the hood, the Landed Cost Voucher saves the allocated costs for each Item in the original purchase document, then reposts that document's General Ledger and Stock Ledger entries to accommodate the updated valuation rates and additional expenses. The ledger entries retain their original posting date and still show the original purchase document for the voucher tied to the entries.

The system also finds and updates entries involving the affected Items for transactions that happened after the original purchase document posting date. One example is if a company records a sale of Items prior to updating the Items' valuation rates via a Landed Cost Voucher. ERPNext will repost the inventory and cost of goods sold entries for that transaction to reflect the updated valuation. Whether a transaction involves revalued Items or not depends on the inventory valuation method (LIFO, FIFO, or Moving Average), but the system automatically determines and recalculates reposts.

On cancellation of a Landed Cost Voucher, the system simply removes the allocated additional costs from the Items in the purchase document, then triggers the reposting sequence. Effectively, the accounting and inventory entries revert to what they were before the Landed Cost Voucher updates.

The following tables show example entries before a Landed Cost Voucher reposts an Item's valuation. The example assumes a company receives 80 of an Item that it purchased for $1.25 each (total of $100). The next day, it records a sale and delivery for 20 of those Items at $2.00 each (total of $40). After the sale, the company receives a bill from a third party for $8 worth of freight charges for transporting the items from the supplier. The company updates the Item valuation to include the freight charges via a Landed Cost Voucher.

Before Landed Cost Voucher and Item Valuation Repost

The following tables show the updated General Ledger and Stock Ledger entries after the Landed Cost Voucher adds $8 of freight charges to the item's valuation and reposts entries. Note that the ledger entries retain their original posting dates.

After Landed Cost Voucher and Item Valuation Repost

The Landed Cost Voucher document does not include the additional cost amounts in the totals for any of the linked purchase documents. A separate Purchase Invoice or Payment Entry to the party can capture each cost.

Stock Closing Settings

The Stock Closing section of ERPNext's Stock Settings document includes several options for the user to put guardrails around who, what, and when the system allows modifications for historical stock transactions.

• freeze all stock transactions as of a given date
• freeze stock transactions that are older than a given number of days
• specify a role where only users with that role may create or edit stock transactions earlier than the latest one in the system

Depending on these settings, it may prevent the submission of a Landed Cost Voucher. For example, if Items are received mid-month via a Purchase Receipt, then at the end of the month, the user updates the Stock Settings to freeze all stock transactions as of that date. If they then try to submit a Landed Cost Voucher to add freight charges on the Items, the system will throw an error, disallowing the stock valuation changes since the original transaction date is now in the frozen period.

How to Repost an Item's Valuation in a Closed Period

What happens in the event a company closes the accounting books in ERPNext, then receives an invoice for landed costs that should update Item valuation within the closed period? Fortunately, the Landed Cost Voucher method still works, as long as the user submitting the document has the correct permissions.

First, a company must set up its Period Closing Settings under Accounts Settings and specify the Role Allowed to Close Books & Make Changes to Closed Periods. A good practice is to create a new role, such as "Controller", assign that role to the appropriate user(s), then enter it in the field. Once these settings are in place, the assigned user will have the ability to make adjustments to a closed period, which includes creating a Landed Cost Voucher.