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Landing Inventory at an Accurate Cost…!!

By August 19, 2019 No Comments

In this world, every penny spent is being assessed and a cost-benefit analysis is being derived. Similarly, for any organization, accurate derivation of costs is crucial. Logistics Management is an integral part of the supply chain; thus, it is critical to derive the accurate inventory cost.

The concept of Inventory Costing are ages old and predominately vary based on the varied Inventory Valuation Methodology followed across the industries.

Standard Cost has the benefits of deviation/variance analysis and easy evaluation of costing and profitability. However, deciding the Standard Cost becomes very subjective, which in turn leads to misrepresentation of correct financial picture and difficult to implement with the current dynamic market.

Similarly, when it comes to Actual Costing (FIFO/LIFO) or Average Costing, both are widely accepted across various industries. Average Costing is significantly different from the prices prevailing for similar products at a given date, hence Average Costing might not be correct in assessing the current Inventory Valuation. Flipping the coin, Actual Costing (FIFO/LIFO) have a downside of being difficult to maintain the cost layers and incorrect Cost of Goods sold, based on the elasticity of the product prices.

A single costing system may not meet all of the reporting requirements for an organization. Many organizations incline towards opting for a combination of costing methods that can be switched or maintained in parallel to meet different information reporting requirements.

With the digitalization of the vendor and customer relation, both the parties in the business get a reach across the globe, which has resulted in an exponential growth in international trade in recent past. Considering the various cost factors involved in International trade, one of the emerging concepts in Cost Management is LANDED COST MANAGEMENT, which helps in deriving an accurate Inventory Cost, showing the correct impact of these cost factors on the top line and presenting a real picture for the bottom line.

WHAT IS LANDED COST?

In Simple Terms, Landed Cost is the total cost involved in bringing the Inventory/Goods to one’s warehouse. In Addition to the Item Purchase Price, Inventory Landed Cost should include the following costs incurred:

  1. Transportation Fees or Freight Cost (Ocean and Inland)
  2. Any Customs Duties, Taxes, Tariff Charges Levied
  3. Any Insurance Charges
  4. Currency Conversion (in case of foreign currency payments)
  5. Crating and Handling Charges
  6. Any other amount paid/to be paid, which is incidental to the procurement of good, till the point the shipment is delivered to the warehouse.

WHY LANDED COST?

For any business, its very important to get the Inventory Valuation, as accurate as possible.

In Cost Management terms, landed cost help in deriving the accurate per unit item cost, thereby leading to determining a Profitable Selling Price for the product.

In Accounting term, the Landed Cost concept helps in correct Asset Valuation and also presenting real picture for the company’s top-line and bottom-line trend over a period, leading to accurate financial reporting.

LANDED COST MANAGEMENT IN ORACLE CLOUD

Oracle Supply Chain Cost Management, provides an enhanced feature of Landed Cost Management. Oracle Fusion Landed Cost Management, is capable of performing the following tasks:

  • Capture LCM Charges:

Actual Charges incurred or estimated charges to be incurred for procuring the inventory can be captured. Estimated Charges can be later updated with the actual charges, once known.

  • Allocation of LCM Charges:

Allocation of the LCM Charges across the items in a shipment can be done of various criteria, like freight case be allocated based on volume occupied, whereas insurance charges can be allocated based on the value of goods.

  • Generate Accounting Entries:

Once LCM Charges are allocated to Item Cost, the same needs to be reflected in the Inventory Valuation on the Financial side. All LCM Charges allocation transaction is finally accounted in Receipt and Cost Accounting Subledger and then transferred to GL, once finally accounted in respective sub-ledger.

ORACLE FUSION LANDED COST MANAGEMENT – PROCESS FLOW

Legend:

ORACLE CLOUD

LANDED COST MANAGEMENT – TERMINOLOGY

  1. Trade Operations

A user needs to create trade operation for grouping landed cost charges which are expected to be incurred for material shipments. Trade Operations also capture the allocation basis for each of the Landed Cost Charges. Trade Operations can be created for any expected shipment and also after the shipment has arrived at the warehouse.

  1. Charge Basis:

The level at which the Landed Cost charges are to be captured under a trade operation.

Possible options are:

    • Aggregate
    • Per Unit
    • Percentage of Item Price
    • Percentage of Other Charges
    • Variable Per Unit
    • Variable Percentage of Item Price
  • Allocation Basis:

Determines how the Charges will be allocated across the Items in a Shipment.

Possible options are:

    • Equally
    • Quantity
    • Volume
    • Weight
    • Item Value
    • Manual Allocation Factor
  • Reference Type

Any business document, E.g.: BOL, that can be associated with landed cost charges in trade operations for establishing an audit trail of the charges. These reference types need to be matched with Landed Cost Charge invoices to capture actual charge amounts.

About the Author

Piyush Bihany is an experienced Supply Chain Consultant having an experience of 9+ years spread across various modules including Oracle Procurement Cloud, Inventory Management Cloud, Cost Management Cloud, Demantra – Demand Planning and S&OP. He has been part of multiple end to end implementation projects on Oracle Cloud. He is a certificated consultant for Oracle Procurement Cloud and Demantra. By qualification, he is a Chartered Accountant and has a sound knowledge of Financial concepts

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