Allocating shipping costs to inventory items

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anonymous

15 Apr, 2010 08:45 PM

Hello,
I purchase items that have a number of costs, such as shipping, packaging, banking fees, customer/duty, and wanted to apply those to by cost of goods sold. For example, I purchase 20 items in one container, and want to apply 1/20th of the extra costs to my cost of goods for each inventory item. These are large costs and should be attached to each inventory item for accuracy.

Can I do that with AccountEdge? I've been wrestling with that one.

Thanks!
FB

  1. 2 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    You would have to build the costs onto the item through auto-buld.
    When you get the shipments, determine what the additional costs are, and create an inventory adjustment. If you buy 5 items, add 5 units of cost to an inventoried item named 'additional costs' based upon the actual cost on the PO. Then 'build' the finished product - 1 original unit with 1 unit of cost.

  2. 3 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    Hello,

    I would like to know if the same apply for Premier Accounting 2006. Is there a way to allocate shipping cost to inventory items without doing an inventory adjustment follow by a build/Autobuild?

    Thanks,
    Alex

  3. 4 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    quote:
    Originally posted by Alex:
    I would like to know if the same apply for Premier Accounting 2006. Is there a way to allocate shipping cost to inventory items without doing an inventory adjustment follow by a build/Autobuild?


    The question really should be asked, Why do you want to do this. Yes, I know that shipping costs are part of the real cost of an item, but for tax purposes, you are generally better off *not* incorporating shipping costs into the item cost. Rather, if you want to know real cost, include the shipping cost in the field Cost in your item pricing information.

    The fastest way, if you decide that you really need to do this (ask your accountant!), to include the shipping cost would be to revise the purchase invoices before entering them (or after, if you can, sometimes they can be locked out), so that the full total shows up under the total for the item. If you have a single item being purchased on an invoice, that's easy, just enter the total under the item subtotal, and the unit cost will be calculated for you. And then zero out the shipping.

    But there is a reason why MYOB is set up the way it is. It is standard not to include freight-in as inventory costs. Indeed, it is not a part of the value of the inventory (usually). As freight, it is deductible each year, immediately. As to the tax problem, if you build it into the inventory, you will not be able to deduct it until you sell the inventory.

    Notice, also, that if you buy more than one item on a single purchase, how will you allocate the freight? If they all weigh the same, not too difficult, but still cumbersome. But if some of them weigh almost nothing and others are heavy and/or bulky, what will you do? And, as I stated above, by building freight into the inventory, you will overstate its value. Suppose two related companies on opposite sides of the U.S. shipped a product back and forth, each time charging cost for it, with the cost being their book value for the goods. Each time they are shipped, if freight costs are built in to book value, their value would increase. But, in reality, they are the same goods. Neither their market value nor their true cost should not change merely because they are shoved about.

    Now, there could be an exception, where you would want to build in freight, though I don't know if doing so would be a sound accounting practice. You buy goods this year, but you are not selling them this year and you don't have income for this year that you need to offset by the freight costs. Here, you might want to postpone the freight cost deduction until the goods are actually sold, when you have the income you need offset. Again, ask your accountant!

    Basically, my general advice is, Don't do it!
  4. 5 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    Hi Daniel,

    Thanks for the reply and the advice.

    Regards,

    Alex

  5. 6 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    Very valid reasons to NOT do it - depending on why you want to.

    If you do want to do it there is an easy trick to it.
    I do this for our CA redemtion value on beer bottles so it ties into the COS.

    On your purchase invoice for each item you are wanting to add to the cost...
    repeat the item right below the first (if you save it as recurring you can also change the name displayed on that line for reference)
    Then enter your quantity and purchase cost on the first item line.
    on the second DO NOT enter a quantity (q=0) but tab to the Total column and enter the amount you want to add.

    i.e
    24 / BSAM / SAMUEL ADAMS 12oz (each)/ $0.9838 / $23.61
    0/ BSAM / SAMUEL ADAMS CRV (.96 for 24)/ no entry / $0.96

    In this example MYOB will put the 24 items with a (total)current value of 23.61 + .96 into inventory and will report the avrg cost as 1.023.

    Give it a try.
    <!--graemlin::)-->
    Dan

  6. 7 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    Be careful on expensing freight vs. allocating in COGS. Depending on the amount it maybe considered aggressive accounting to expense. Check this IRS link for further guidance.
    http://www.irs.gov/newsroom/article/0,,id=160515,00.htm...0,,id=160...

  7. 8 Posted by anonymous on 15 Apr, 2010 08:45 PM

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    quote:
    Originally posted by smitty:
    Be careful on expensing freight vs. allocating in COGS. Depending on the amount it maybe considered aggressive accounting to expense. Check this IRS link for further guidance.


    The URL given seems to have been malformed. This works for me:
    http://www.irs.gov/newsroom/article/0,,id=160515,00.html

    The article does not cover this topic, which was about allocating freight cost to items, individually. It indicates that Freight-In is part of COGS, but this does *not* mean that it is allocated to the items.

    I'm going to hasten to note that I'm not an accountant and that I have not consulted one on this topic. Accountants have looked over my books, but they have not been audited, and if not allocating the specific freight cost of an item is an error, they might well not have noticed it.

    But now I'm going to argue that it should not be a part of the item valuation in the inventory. It should properly be entered on the Cost of Goods Sold form (part of Schedule C for self-employed) under Other Costs. This is what all bookkeeping programs I have seen make easy. You'd have to take special steps to do otherwise. MYOB by default puts Freight costs into a Freight Expense account. I don't think it is placed under COGS, but I moved it there.... the bulk of freight expenses we pay are for goods we sell. Like 99%.

    As another matter, it would be extraordinarily complex to allocate freight costs to items. What if you buy multiple items, of different weights, billed on the same invoice? Do you really want to try to allocate those costs to each item?

    It is an error to enter the freight as a regular Expense, but the error results in no change in net income or tax, as far as I can imagine. So don't lose sleep over it.

    Why should it not be part of the inventory valuation? Well, when you move inventory from location to location, you incur freight costs. Ordinarily, these costs do not increase the value of an item. So they should not be included in the inventory. The money was spent, it is gone. That is an expense in my book. The amount spent is irrelevant to the value. (except under unusual circumstances, for example, if you have a manufacturing facility on the moon, shipping stuff there from the earth is extraordinarily expensive. The goods are thus presumably more valuable on the moon. So it would be legitimate to include the shipping cost. Every seller on the moon would have incurred those costs, if the item can't be manufactured there.)

    To value items in inventory based on shipping costs will increase, ordinarily, the income tax you pay, because you cannot expense the value of your inventory, except when it is sold. If you pay local property taxes, you will likewise increase your tax.

    So, in the absence of some specific rule or knowledgeable tax advice, I'm expensing freight for the goods we buy, under COGS, in the Other Expense category. I think I write in Freight-In, I forget exactly how the form works. In the extremely unlikely event that we are audited, and I turn out to be wrong, the position is nevertheless a reasonable one so there is no real possibility of prosecution for tax fraud. Once I ask an accountant the question, if that consultation could be proven, I *would* be exposed to prosecution. So should I hasten to ask? You figure it out.

    We are engaging an accountant in the near future, and, if there is something wrong about this -- which I doubt -- it will be corrected.
  8. 9 Posted by Meagan on 11 Mar, 2011 05:10 PM

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    According to financial accouting standards, freight in is added to the cost of inventory, freight out is a selling expense. If you are not following GAAP or are using different accounting for tax purposes, you should speak with your tax professional.

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