Managing Landed Costs During the Import Process

• Imagine that a large part of your company's business is importing goods from overseas and selling locally.
• When goods arrive to the port, additional charges must be paid, before you can release the goods to your warehouse.
• These charges include customs and additional expenses for storage and shipping.
• In order for your Cost of Goods Sold accounting to be correct, these additional charges must be embedded in the item's cost.

• Landed Costs are additional expenses that may apply during the import of goods. When items are imported, you often pay customs duties on top of the cost of merchandise. A customs duty is a tariff or tax imposed on goods when the goods are transported across international borders.
• In addition to customs duties, additional expenses may apply during the import of goods.
• Expenses such as shipping, insurance and storage are considered landed costs.
• You can use the landed cost document to help you estimate and track customs duties and landed costs so that you can capture these expenses and update the inventory unit cost of the items you purchase.
• You can also choose to update a price list of your choice as well as last purchase price.

• When landed costs are entered you can choose how the landed costs are distributed.
• For example, insurance is often based on the value of an item so you may wish to have the insurance cost distributed to the items based on the cost of each item.
• On the other hand, shipping costs are typically based on weight or volume. Therefore you are likely to choose one of those methods for distributing shipping charges across several different items.

Let’s look at the landed cost process in SAP Business One, Web client. ​

Once you receive a notice that the items have arrived at the port, you start by issuing either a Goods Receipt PO or an A/P invoice. You must record the customs duties and any additional cost related to this import. ​

The landed cost is based on the goods receipt PO or the A/P invoice. Each item must have a customs group assigned to it, which is associated with a percentage, to calculate the customs amount. Note that basing landed cost on AP invoice is only supported in a perpetual inventory system.​

Optionally, additional expenses such as shipping and storage can be applied to the landed cost document. The customs and landed cost expenses are allocated to each unit, and are added to adjust the item cost, so the unit cost reflects the additional expenses paid in addition to the purchase price that appears in the goods receipt PO or A/P invoice. ​

The broker is a third-party vendor who charges your customs and landed costs. The broker issues a separate A/P invoice based on the landed cost document. ​

In some cases, you don’t know the final charges, so you may create a landed cost document, with an estimated amount for customs and landed costs. Later, once you get the final amounts, you can copy the landed cost to a second landed cost document to adjust the amounts. ​

• We will look at a simple example with landed costs.
• In this case, we have ordered three new tablet items from a vendor.
• We receive the items on our goods receipt PO, but we do not yet have the shipping, insurance and storage costs.
• The three items are the same weight and volume, but they vary in price.
• We will use a landed costs document to add those costs and allocate them appropriately.

• We enter the vendor code into a new Landed Costs document, then use Copy From to bring in information from the Goods Receipt PO.
• Information on the items, prices, weight and volume is copied into the document.
• The Fixed Costs and Fixed Costs Total Value columns will fill in automatically based on allocation setup once costs are entered.

• We have received the cost details for insurance, shipping and storage during transit.
• We enter the amounts into the appropriate categories on the Costs tab.
• Our company has landed costs categories preset with allocation methods
  • Insurance is allocated based on price
  • Shipping is allocated based on weight
  • Storage is allocated based on volume
• These allocations can be changed inside the landed costs document if needed.

• After entering the costs, we return to the Items tab and see the changes.
• The total costs of 200 for insurance, shipping and storage have been distributed to the rows.
• The Fixed Costs Total Value column shows what is actually being allocated to each row.
• The Fixed Costs column shows the allocation per unit.

• In the journal entry for the landed costs, we see that the total additional landed costs are:​
  • debited to the inventory account, and
  • credited to a landed costs allocation account.​
• The costs have been added into the base price to come up with a new warehouse cost price for the item.​
• Note that in a non-perpetual inventory company, no journal entry is created when adding the landed cost.​

• Landed costs affect the item cost by default .​
• Note that when the Apply Fixed Costs field states No, then the landed cost row amount will not affect this item’s cost.​
• Landed costs can affect the last purchase price and other price lists.​
• On the Items tab in the Landed Costs document in the Details area, we can view the price list that will be affected by the landed costs. The default price list is the last purchase price list.

• Landed costs might come in from more than one vendor. For example, you might have two different shipments associated with the order that come from two different vendors, or even copy two different purchasing documents into the same landed costs document.
• In the General tab you can choose multiple vendors.

• Customs duty is a tariff or tax imposed on goods when the goods are transported across international borders
• Each item type has a specific duty rate which is determined by a number of factors, including where you acquired the item, where it was made, and what it is made of.
• The customs duty rate is a percentage. This percentage is determined by the total purchased value of the items paid at a foreign country
• Remember that every county has different regulations regarding customs, therefore you must follow the local requirements when working with customs duties.

• You need to define customs groups in SAP Business One, Web client based on the type of items you are importing from foreign countries.​
• Each group reflects a projected percentage of the purchase price to calculate customs duty expenses.
• When the landed cost document is created, you can choose that customs affect the inventory unit cost.
• In addition, custom duties can affect a price list of your choice including the last purchase price.​
• Customs groups are assigned to the item master data record in the Tax tab.

• As explained earlier, customs charges vary based on the type of items you are importing, for example accessories, electronics, food and beverage. For each type of duty charges, create a different customs group.
• Enter the name of the customs group.
• The customs, purchase and other columns, are percentages that represent the breakdown of the customs charges.
• The total column, displays the total percent that is used in the landed cost document, to calculate customs amounts. This column is calculated based on the preceding 3 columns using a specific formula based on customs requirements.
• Alternatively you can simply enter the total percentage in the total column.
• In our scenario, you are importing accessories and electronics. Each has different customs duties, therefore you need to set up two customs groups.
• These groups, needs to be assigned to the item master data after they are created.
• In the last two columns, define the customs allocation and expense accounts. These are used when landed cost document is added to the system, and when the broker invoice is posted.

• Let us talk about how the 2 accounts are used in the accounting system.
• The customs expense account should be set up as an expense type in the chart of accounts. It is used when customs do not affect inventory.
• Once you add the landed cost document, the customs expense account is debited and the customs allocation account is credited.
• When you post a landed cost document that affects inventory, the customs allocation account is credited and the inventory account is debited.
• Later, when you create the broker's A/P invoice, and you base it on the landed cost document, the customs allocation is cleared and its balance zeroes out.
• Since the customs account is a clearing account, it can be set up under the liabilities, with the other inventory variance accounts.
• To indicate whether or not customs should affect inventory or not, check the box Custom Affect Inventory in the Items tab of the Landed Cost document. When this check box is NOT selected then the customs amount is posted to the customs expense account.

• You can define landed costs in the Configuration menu for sales purchasing.
• First, you define a code and a name for the expense.
• Since a landed cost is entered as one amount, you need to decide how this amount is allocated between items in the landed cost document. There are 6 allocation methods available.
• A liability account needs to be defined per expense. This account is used as an allocation account when the landed cost document is added. The entry is cleared once the A/P invoice from the broker is entered.
• As you can see, there are no amounts of percentages in the setup for landed costs, as well as no item affiliations. Those are entered in the landed cost document itself.

The allocation methods are for your discretion. For example, it is common sense to base insurance expenses on the cash value, but storage is most likely to be tied to the items' volume. Shipping could be related to the items weight or volume.

Expenses like security would probably be divided equally, since security is unlikely to vary due to factors relating to each item's characteristics.

Note that the allocation method can be modified in the landed cost document as needed for exceptional cases.

• Let's take a closer look at the allocation account.
• When the landed cost document is added, the inventory finished goods account is debited, the landed cost allocation account gets credited.
• Later, when the broker invoices is added based on the landed cost document, the account is cleared and debited, the vendor gets credited.
• Therefore the landed cost allocation account's balance represent the total landed costs posted, but not billed by the broker.