Landed Cost Accounting in a Standard Cost Division
When using the Standard Cost method for valuing inventory, the inventory is stated at the Standard Cost defined on the Item. The Standard Cost Components are broken up into Material, Labor, Overhead, etc. With the Landed Cost program, Freight and Other Landed Costs will be included as additional cost components used to calculate the Standard Cost of an item.
Adding or receiving inventory in a standard cost environment will increase the quantity of inventory on hand with the unit cost of the Item equal to the sum of the standard cost components. If the Purchase Price of the item does not equal the Standard Cost, the difference will be recorded to a variance account.
EXAMPLE There are 5 units on hand with a total standard cost of $10 per unit ($8 standard for Direct Material, $1 standard for Freight and $1 standard for Other Landed Costs). A Purchase Order is created for 5 units at $11 per unit plus $1.25 per unit for Landed Cost Freight and $1.50 per unit for Other Landed Costs, for a total Purchase Price of $13.75 per unit. When received to inventory, the Standard Cost calculation will result in 5 units being added on hand at a Standard Cost of $10 per unit and a variance of $3.75 per unit (5 units = $18.75 total variance) will be recorded to an expense account. The ending inventory will equal $100, or 10 units at a Standard Cost of $10 each.
In a Standard Cost Division and using the above example amounts, the Cost Transaction to record a Purchase Order Receipt for a quantity of 5 units, including landed costs will be:
| Sub-Ledger Account | Debit |
Credit
|
|---|
| Inventory | $50.00 | |
| Purchase Price Variance (Material) | $15.00 | |
| Freight Cost Variance Expense | $1.25 | |
| Other Landed Cost Variance Expense | $2.50 | |
| Accrued Payables | | $55.00 |
| Landed Cost Freight Clearing | | $6.25 |
| Landed Cost Other Landed Clearing | | $7.50 |
RELATED ARTICLES
Standard Cost Overview
Inventory Item Standard Costs
Purchase Order Receipts
SEE ALSO
Rootstock Schema Builder - Freight and Landed Cost
Freight & Landed Cost: Setup
Freight & Landed Cost: Weighted Average Cost
Freight & Landed Costs: Overview
