Product costing
The buying price is the raw cost of the product. Product costing gets complicated when involving landing costs (e.g. insurance and freight), labour, other costs such as certification.
Assuming you imported a new electrical product, which involved landing cost and a certification cost for testing the product to ensure it’s safe for local usage. If the product buy price is $100 per unit and you bring in 1000 units. Let’s say the landing cost for the batch is $10,000 and a certification cost is $5,000.
Besides entering the transaction according to the bills received, you may consider adjusting the buy price to reflect the “actual” cost of goods or using a plussage feature to determine the selling price. It depends on your business and accounting process to adopt a costing method.
Method One: Enter according to the bill information.
Enter the three transactions as:
- Supplier bill for the product: $100 x 1000 units = $100,000
- Forwarder bill: $10,000
- Payment for the certification: $5,000
The journal behind these transactions are:
Supplier bill:
DR. Inventory Assets (BS): 100,000
CR. Accounts Payable (BS): 100,000
Forwarder bill:
DR. Freight (PL): 10,000
CR. Accounts Payable (BS): 10,000
Payment to Certification Board:
DR. Certification Expense (PL): 5,000
CR. Bank (BS): 5,000
Now, if you sell ten units of the product at $200 per unit, the journal for the sales invoice:
DR. Accounts Receivable (BS:) 2,000
CR. Revenue (PL): 2,000
DR. Cost of Goods Sold (PL): 1,000
CR. Inventory Assets (BS): 1,000
The cost of goods sold picks up the raw buy price of the product, which is $100 per unit, without considering the landing and certification cost. Although the expenses record correctly, the cost of goods sold does not reflect the “actual” costs. It may be difficult for the business owner to analyse or adjust the markup when the related costs increase.
Method Two: Increase the buy price.
To reflect a realistic product cost, you may enter the supplier bill as:
Product: 1000 ea at 115,000 (increase from 100,000 to 115,000) Landing Cost: -1 ea at -10,000 Certification Cost: -1 ea at -5000
Although the buy price increased, the dummy landing and certification cost offset the increased buy price, and the amount owing to the supplier remains as 100,000. This method increases the unit cost from 100 to 115.
The journal for the supplier bill:
DR. Inventory Assets (BS): 115,000
CR. Accounts Payable (BS): 100,000
CR. Landing Cost (PL): 10,000
CR. Certification Cost (PL): 5,000
The landing and certification cost will be zero once you enter the forwarder bill and payment made to the appropriate certification board. The entry for the:
forwarder's bill:
DR. Landing Cost (PL): 10,000
CR. Accounts Payable (BS): 10,000
And the payment to the certification board:
DR. Certification Cost (PL): 5,000
CR. Bank (BS): 5,000
Assuming you sell ten units of the product at $200 per unit, the journal for the sales invoice will be:
DR. Accounts Receivable (BS): 2,000
CR. Revenue (PL): 2,000
DR. Cost of Goods Sold (PL): 1,150
CR. Inventory Assets (BS): 1,150
The gross profit dropped from 1000 (2000 – 1000) to 850 (2000 -1150).
Although this method gives the business owner a better overview of its gross profit and more “accurate” costing for analysis and commission calculation, the entry can be tedious. Assuming multiple products with different gross weights and packing sizes in one shipment, it’s time-consuming to allocate landing costs to each product.
Method three: Isolate the product costing from financial accounting.
Plussage feature could be a better option if your objective is to calculate the margin (or markup) without affecting the account. Plussage is an additional cost over the original buy price.
Assuming the landing cost is fixed at $15 per unit. An estimated value determine a reasonable markup to derive a selling price, which you can adjust according to cost changes.
Based on the above example, you sell ten units of the product, the cost of goods sold remains as $1,000 ($100 x 10), it will not consider the plussage value in financial accounting. However, you can use the built-in reporting tool in the MoneyWorks accounting system to customise a sales report to include the plussage value (below is a sample report did by our programming team).
You can get a MoneyWorks consultant to customise a report (or purchase a ready-made) if you do not wish to spend time do it yourself.
The beauty of MoneyWorks, compared with other small business accounting systems, besides having both local server and cloud-based, it has a powerful reporting tool allowing the user to extract data from the accounting software for further analysis or interchange data with another system via API (Application programming interfaces).
Download a trial to test drive or book a demo to find out more about MoneyWorks accounting software.