THIS ONE LITTLE TRICK COULD BRING ENORMOUS PROFIT THIS YEAR

Sorry, I had to do that.

I take it your inventory is established, when received, at your cost. Your cost is plucked from the invoice sent to you then the product is shipped. Okay, so you’ve gotten the bikes and such on the books at your cost. When you sell it, your system will find the cost (average, FIFO, whatever), match it to the sale price, and come up with your gross profit. From gross profit we deduct your general and administrative (operating) expenses to arrive at net profit. This is your bottom line. This is why you are in business.

If already your eyes are aglaze (when was the last time you used that word!), bring over your bookkeeper to read along with you. This is going to be fun.

So, after you’ve recorded your newly acquired assets at cost, what do you do with the shipping charge, the customs, the duty, and brokerage charges that might also appear on the invoice? If you have expense categories for these charges, and if this is where you record them, put on your reading glasses because you’re doing it wrong.

Let’s talk about recording your inventory assets at landed cost. According to GAAP, the accounting rules your bookkeeper follows, inventory is recorded at cost. But, what is cost? When you buy a computer for $800 plus $64 sales tax, what is your cost? Yep, your cost is the actual amount of money you no longer have as a result of your purchase. This is the concept of landed cost, and it’s a real thing and in total compliance with GAAP.

Let’s illustrate:

Invoice
20 Bikes at $600 each = $16,000
Shipping = $600
TOTAL INVOICE = $16,600

Accounting
Inventory – 20 units x $600 = $16,000
Shipping Expense = $600
IMMEDIATE CHARGE TO EXPENSE = $600

Same Transaction Using Landed Cost Approach

Accounting
Inventory – 20 units x $630 = $16,600
IMMEDIATE CHARGE TO EXPENSE = $0

Voila. By dividing the shipping cost into the number of units, we have deferred the cost for shipping to whenever we sell each bike. Cost of Goods Sold increases, of course, but for accounting purposes you aren’t deducting for the cost of shipping until you sell the bikes. If it takes ten years to sell the last of the bikes, this is when you will have paid the shipping on that bike, at least for accounting purposes.

Where there are invoices with a mix of bikes at various cost, just use a formula to weight the shipping cost.

For instance:

Invoice
5 Bikes A x $400 = $2,000
9 Bikes B x $350 = $3,150
6 Bikes C x $700 = $4,200
Subtotal Bikes = $9,350
Shipping = $600
TOTAL INVOICE = $9,950

Accounting
Bike A – $2,000 / $9,350 = 21.39%
$600 x 21.39% = $128.34
$128.34 / 5 Bikes = $25.67 each
Record each bike at $425.67 ($400 + $25.67)

Bike B – $3,150 / $9,350 = 33.69%
$600 x 33.69% = $202.14
$202.14 / 9 Bikes = $22.46 each
Record each bike at $372.46 ($350 + $22.46)

Bike C – $4,200 / $9,350 = 44.92%
$600 x 44.92% = $269.52
$269.52 / 6 Bikes = $44.92 each
Record each bike at $744.92 ($700 + $44.92)

Bike A – $425.67 x 5 = $2,128.35
Bike B – $372.46 x 9 = $3,352.14
Bike C – $744.92 x 6 = $4,469.52
TOTAL TO INVENTORY = $9,950.01 (round down to get rid of the penny)

Want to learn more about recording inventory at landed cost? Drop me a line or give me a call. I graduated 300 grocery checkers, construction workers, dishwashers, and plumbers in Accounting!

Why not have Prime Velo take a look at inefficiencies you might have in your back office operations. Cost savings adds to profits, right?

-Barry Riemer, Mar 15 2017