When you receive items from a supplier using a Receiving Report (RR), the system calculates the true cost of those items, often called the Landed Cost. This cost includes not only the purchase price of the items but also any additional expenses incurred to get those items into your warehouse, such as freight, duties, insurance, or handling fees.
Accurately calculating the landed cost is crucial for correct inventory valuation and understanding your true profit margins when you sell these items.
How Costs are Recorded
Receiving Report Creation: You might create a Receiving Report manually, or it might be automatically generated when you process an Inbound Shipment linked to a Purchase Order Shipment.
Item Costs: When items are added (manually or automatically), the system uses the purchase price per unit from the source Purchase Order or allows you to enter/confirm it.
Extra Costs:
On the RR: You can add extra costs directly to the Receiving Report itself (e.g., a local handling fee specific to this receipt).
From the Source: If the RR was generated from an Inbound Shipment linked to a Purchase Order (PO) Shipment, the RR also considers the extra costs defined on that original PO Shipment (e.g., freight, duties).
How Extra Costs are Spread (Allocation)
The system automatically distributes any extra costs across the individual items received on that report to ensure each item carries its fair share of the expenses.
Costs Added Directly to RR: Extra costs added directly to the RR are typically spread across items on that specific RR based on quantity, value, weight, etc.
Costs Inherited from Source (e.g., PO Shipment): This is important when dealing with partial receipts from a single PO Shipment. If one PO Shipment (with its own total freight/duty costs) is received via multiple separate Inbound Shipments / Receiving Reports:
The total extra cost from the source PO Shipment is divided proportionally among all the partial RRs created for it.
The proportion allocated to a specific partial RR is calculated based on the specific
cost_allocation_type(e.g., Unit Based, Value Based) defined on the original extra cost from the PO Shipment. The system compares the basis (e.g., total quantity for Unit Based, total value for Value Based) of the items received on the partial RR to the total basis for all items on the original PO Shipment.For example: A PO Shipment has a $500 duty charge set to allocate based on Value.
The total value of items on the PO Shipment is $10,000.
You receive items worth $2,000 on the first RR. This RR gets ($500 * $2,000 / $10,000) = $100 of the duty allocated to it.
You receive the remaining items worth $8,000 on a second RR. This RR gets ($500 * $8,000 / $10,000) = $400 of the duty allocated to it.
This ensures the full source cost is accounted for across all related receipts using the intended allocation method.
Allocation Method Within RR: Once an amount (either added directly or prorated from the source) is assigned to the RR, it is then spread across the specific items on that RR using the same allocation type defined for the cost.
Calculating the Final Item Cost (Landed Cost)
For each item line on the Receiving Report, the system calculates the Landed Cost as follows:
Landed Cost per Unit = Purchase Price per Unit + Allocated RR-Specific Extra Costs per Unit + Allocated Source Shipment Extra Costs per Unit
This Allocated Source Shipment Extra Costs per Unit is derived from the proportional share described above.
Impact on Inventory Value
When you finalize the Receiving Report, the system adds the received quantity to your inventory stock. The value recorded for this new stock is based on the calculated Landed Cost per Unit.
This means your inventory valuation accurately reflects the total cost incurred to acquire the items.
When these items are later sold or consumed, the Cost of Goods Sold (COGS) will be based on this recorded landed cost, leading to more accurate profitability tracking.
Updating Costs After Receiving
If you need to update the costs (item price or extra costs) on a Receiving Report after it has already been processed and added to inventory, the system will update the inventory cost records for any remaining stock from that receipt.
Important: Simply updating an old Receiving Report does not automatically change the cost assigned to items from that receipt that have already been sold or shipped on Sales Orders. The cost recorded at the time of sale remains unchanged by default.
Correcting Costs for Past Sales
In situations where a significant cost correction is made to an old Receiving Report (e.g., a large freight charge was missed and added later), the costs recorded for past sales might become inaccurate.
Correcting the costs assigned to past sales requires a separate process. This is typically handled by system administrators or support using specific tools designed to reconcile historical sales data with updated cost information.