Landing cost concept and calculation methods.

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In order to understand the importance of landing cost in Inventory Management, we need to know what consists of the landing cost. Simply put, landing cost is the total cost of a product when it arrives at the door of the buyer and it consists of three basic elements which are -

• Purchase price
• Purchase discounts
• Purchase expenses (Purchase additions)  

Purchase price is the amount of money payable by the buyer to the seller for purchasing a product or service. The expenses incurred by the buyer like Freight, insurance, ware-housing, taxes or expenses in any other form comes in the category of Purchase additions (Purchase expenses). Purchase discounts are the discounts in prices made available to the buyer by the seller in the form of cash discounts or volume discounts or trade discounts, etc.

Landing cost is a part within the supply chain management. However arriving at the landing cost is very important and its relevance in accounting is significant because the purchase cost or landing cost reflects and affects the Profit & Loss Account, Balance Sheet and Stock valuation. The treatment of the above elements are differs from industry to industry or individual to individual. However, the popular method is mentioning the purchase cost, purchase additions and purchase discounts separately for arriving at landing cost. That being said, the landing cost calculation for a user largely depends on their logistic operations.

INTEGRA ERP is one of the best landing cost tracking ERPs in the market. In Integra ERP, all diversified interests of the users have been taken care of. Integra ERP has provisioned for choosing, at the option of the user, the best suited stock valuation method -   

• Purchase Rate or
• Landing Cost 

In the case of landing cost based stock valuation method; INTEGRA ERP has further provisioned to choose different features at the option of the user:

• Quantity wise  
• Amount wise
• Volume (Weight) wise. 

The impact of purchase additions or purchase expenses on the price of a product varies in each of the above methods. The following illustration explains the impact on product pricing in each of the above methods.

Illustration: If a buyer orders 3800 units of product-A having total weight of 9500 kgs (2.5 KG per unit) at purchase price of Rs: 50 per unit and 25 units of product-B having weight of 500 kgs. (20 kg per Unit) at purchase price of Rs:600 per unit  in the same truck with transportation cost of Rs:10000/-.

Method 1

Method 2

Method 3

Note: For calculation purpose, figures are rounded off to two decimals in above tables 

In Integra ERP, stock valuation can be made either automatic or manual as per the requirement of the User.

In Integra ERP stock valuation report can be generated in any of following methods:

• PURCHASE RATE
• LANDING COST

Stock valuation report helps the user to identify the actual value of the raw material or finished goods and also expenses incurred for a particular product or the total overhead expenses on purchases by evaluating the stock valuation report.  Finding the true cost of a product will lead to improved decision making and efficient business analysis. This feature in INTEGRA ERP is highly helpful for the users especially in the GST environment, as GST on such expenses is claimable as Input Tax credit.

Log in to INTEGRA ERP

                Go to System Utilities from the Main Menu

                Click on Settings

                In the vertical menu open Normal Settings

                In the Sub-Menu in Accounts and Others

User can configure the landing cost calculation method they wish to adopt by clicking on the radio buttons.

PATH: System Utilities  à Settings à Normal settings à Accounts & others 

How landing cost gets reflected in different reports

Stock Valuation

As explained elsewhere in this discussion, user can select different valuation methods for generating stock valuation report with INTEGRA ERP. At the option of user, the stock valuation reports can be generated with data for raw material or finished products or a combination of all. 

How landing cost gets reflected in the P& L and Balance Sheet:

In order to give a perfect picture of the profitability in each item, it is imperative that the purchase cost and the purchase additions are booked in the account using the method that is best suited to that particular user. In the foregoing article we have discussed what consists of the landing cost and how the purchase additions or expenses get affected differently on the product costing depending upon what method the user adopts.  When any item is bought, it adds to the asset and it will get so booked in the account statements with item price and purchase additions. If the actual price and additions are not properly recorded it will wrongly reflect in the stock valuation of the items and any analysis based on that will be in-accurate. Therefore INTEGRA ERP enables the user to adopt the best method suitable to them from the different methods available in the software.

Profit Statement:

Finding the actual cost of the item is very important to understand not only the most profitable item but also the most profitable customer. It is essential for any user to analyze the margin, generated from the sales activity periodically to facilitate course corrections wherever necessary. The profit statement feature provided in the INTEGRA ERP is conceived to serve this most vital requirement of any user. Using Integra ERP the user will get the accurate margin with or without landing cost along with its ratio. Margin will also be calculated bill wise, account wise or item wise and for any period the user is at liberty to set.

                                                                                                           Download Integra ERP