Purchase Orders and Landed Costs

This article covers landed cost management in the context of purchase orders within Stock&Buy.

Shipping or freight-in costs are an import expense which accounts for the stock on hand value and is an important constituent of the cost of goods purchased. The cost of goods (or any asset) includes all costs necessary to get a product from your supplier to your customer’s hands. In Stock&Buy, these costs are referred to as Landed Costs.

Create landed costs

To add landed costs when receiving goods on a purchase order:

  • Open the purchase order to amend
  • On the main order view, click on New landed cost
  • Type in the name, quantity, discount (if any) and the price of the landed cost

Stock&Buy will automatically suggest default landed costs. You can override this behavior by entering a custom name for the landed cost 

 

Purchase orders and landed costs

You can add landed costs at any stage of the purchase order life cycle as long as the order is not fully received. 

Applying landed costs

The landed costs are applied to the purchased goods when the order is fully received. These costs are factored into the purchased goods cost following a weighted distribution. The calculations are performed as follow:

  • Let Total_Landed_Costs be the total landed costs for the PO. This is calculated by adding all separate landed costs part of the PO.
  • Let Order_Units_Count be the total number of units received in the PO.
  • Let Avg_Landed_Cost = Total_Landed_Costs / Order_Units_Count. This represents the average distributed cost per unit. 

For each line item in the purchase order:

  • Let Current_Value be the total stock value for the order item. Current_value = stock quantity * product moving average cost (MAC)
  • Let Purchase_Value be the stock value purchased. Purchase_Value = (Purchase price * Purchased quantity) – Tax.
  • Let True_Purchase_Value = Purchase_Value + (Avg_Landed_Cost * Purchased quantity)
  • The MAC value of the product is updated as follow:  MAC =  (Current_Value + True_Purchase_Value) / Total_stock

Landed costs in practice

Let’s illustrate the above math with an example. Let’s consider the following purchase order:

Order line item Current Moving Average Cost Stock quantity Received Quantity Purchase price per unit
Green widget $10 20 5 $12
Red widget $9 13 8 $15
Shipping (landed cost)     1 $100
Storage (landed cost)     1 $150

 

  • Total_Landed_Costs = $250
  • Order_Units_Count = 13
  • Avg_Landed_Cost = $250/13 = $19,23

The landed costs will factor into the green widget as follow:

  • Current_Value = 20 * $10 = $200
  • Purchase_Value = 5 * $12 = $60
  • True_Purchase_Value = $60 + ($19,23 * 5) = $156,15
  • MAC = ($200 + $156,15) / 25 = $14,24

Notice the considerable jump of the MAC value from $10 to $14,24 after the landed costs have been factored in.

The red widget:

  • Current_Value = 13 * $9 = $117
  • Purchase_Value = 8 * $15 = $120
  • True_Purchase_Value = $120 + ($19,23 * 8) = $273,84
  • MAC = ($117 + $273,84) / 21 = $18,61

Just like the green widget, the red widget’s MAC value has jumped from $9 to $18,61

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