F&B Industry – Landed Cost, a purchasing challenge.
One of the interesting things about the Food and Beverage industry is the cost accounting focus on small dollars expenditures with large volume of transactions.
The focus of this blog is to introduce Landed Cost’s in a D365 purchase in process.
Landed Cost is the total cost of materials purchased including freight (ocean and domestic), duty, customs fees, insurance, and other fees. It is important to gather landed costs in a systematic manner, as today’s global economy has many opportunities for profit and we lack the time to manually manage the costs.
In D365 a company places a Purchase Order with a ‘material’ vendor. Ancillary to the ‘material’ purchase other vendors invoice the entity for various landed costs. D365 has out of the box capabilities to capitalize all of these costs to the food and beverage inventory.
Including landed costs is very important for Food and Beverage companies when they calculate Cost of Goods sold margins. The landed costs can be significant, often exceeding the cost of the materials. Note scenario A vs. B below. Scenario B provides a more realistic margin, enabling Food and Beverage companies to realistically manage their business.
Landed Total 10.00
Scenario A, without landed costs
Sale Price $11.00
COGS (materials only) 2.00
Scenario B, with landed costs
Sale Price $11.00
COGS (landed) 10.00
Landed Cost Flow
Management of the Landed Costs has to accommodate the large volume of transactions, thus a key field for aggregation of the various invoices can be easily handled with a Financial Dimension. A purchase order number is an ideal candidate for the key field as the original Purchase order is known and subsequent invoices can reference the same PO number e.g. PO # field on the shipping company’s bill of lading.
An overview of the financial process is to add charges via costing sheet or auto charges codes to add accruals for all the costs upon posting of the ‘Purchase order receipt’.
Example, Purchase order receipt
Accrued Inventory $10.00 debit
Accrued Liability, Material Vendor $2.00 credit
Landed Liability, Duty $0.50 credit
Landed Liability, Freight $7.50 credit
Invoice from the material vendor would follow normal PO Invoicing, whereas invoices from the landed cost vendors would be applied the corresponding landed liability accounts.
Subsequent blogs will cover detailed setup and processing in D365