Offer: Superior NetSuite Landed Cost Practice with Late Vendor Bills

This article is relevant if you are seeking to use NetSuite Landed Cost yet the time between when you receive the actual vendor bills for landed cost versus the time you receive the inventory item receipt is significant.

Background

NetSuite’s Landed Cost mechanism has grown in capability since it was first released offering a number of different options to capitalize inventory for non purchase order (landed) based costs. Yet, it can be challenging to manage this process because the timing for which the inventory is received and the information known for landed costs may be significant (in other words, the landed costs are late with respect to the inventory receipt).

During normal Inventory Item Receipt functions, NetSuite wants to debit Inventory and credit Inventory Received Not Billed (a purchases based accrual account). The Item Receipt functions allows for capitalizing landed landed costs into inventory which can come from a linked Vendor Bill which will debit inventory (increasing cost) and crediting a related cost category GL account. Yet, the following considerations make the operation cumbersome:

  1. Accounting Periods Close:  by the time the landed cost bill arrives, the accounting period may have closed.  Linking landed costs to an item receipt in a closed period can affect inventory valuation and thus gross margin for the closed period.  Re-opening and closing accounting periods is also costly and has downstream affects in subsequent reporting forcing new explanations.  In general, we do not want to affect inventory costs in any way in closed periods.

  1. Complex Landed Cost Entry Practices: when landed costs come into the Accounts Payable function, the accounting staff needs to perform work to find the related item receipts and perform record linking operations.  Not only may this lookup be challenging, but if there are multiple item receipts that need to be addressed, the bill entry practice becomes complex.  Accounting Controllers know that the skills required to get this right are more demanding.
For these reasons, I offer a superior practice.

Landed Cost Estimates and Contra Accounting

To solve for these challenges, I propose that landed costs be estimated at the time of the purchase order.  In my work with many different clients, most all of them have a good idea of the additional landed costs that accompany inventory receipts.  Here is how the practice works:

Item Receipt Estimated Landed Costs

During Item Receipt, record the estimated landed cost. ¬†In a separate article, I will describe how we have created a Freight Container object that holds estimated landed cost and automatically applies the landed cost estimate. ¬†However, there are different techniques that can deployed depending on the nature of your organization’s landed costs and how you would factor in the purchase order entry practices and related item receipts. ¬†Ultimately, some formula is used to produce the landed estimate. ¬†During actual item receipt, once you know the estimate, use NetSuite’s different landed cost allocation options that fit your requirements.

Setup Accounting Cost Category records to route the credit account.  While not required, I propose that a Contra Landed Costs Liability account be used so that it is easy to see the estimated flows from the Actual Landed Costs (discussed next).

Record Actual Landed Costs Similar to other Accounts Payable Practices

The next step simplifies the entire practice.  Accounting staff enter bills as they receive them without worrying about linking them to the item receipt.  This will drive the entire practice faster because it is simple bookkeeping.  Here, we have some flexibility related to the date of the invoices.  If the accounting period is already closed, then it may make sense to enter the landed cost vendor bill at the date of receipt.  However, if the accounting period for which the landed cost applies is open, use the item receipt date, if known.

In this practice, a debit will be routed to a Landed Costs Liability account.  The credit goes to Accounts Payable.   Timing differences based on accrual accounting will be discussed next.

Analyze Landed Costs Liability Costs at Month End

The key to this practice is to understand that just like using inventory purchase accruals to account for the differences between Item Receipts and related Vendor Bills, we are producing a similar situation.  Here, we want to account for two variables:

  1. Accruals for Landed Costs Bills Not Received:  the landed cost estimate practice provides a credit to a liability account effectively giving us our accrual.  We are good here especially if we trust our estimated landed costs.
  2. Explanations for Estimated versus Actual Landed Costs: ¬†here, we need to produce a reasonableness¬†assessment between the landed cost estimates and the related actual landed cost bills. ¬†Different techniques can be used to isolate out the accrual above from the variance between estimate and actual. ¬†Indeed, a record linking between the actual bill and the item receipt would be a sure way compare side by side costs — yet linking, as mentioned earlier may be cumbersome. ¬† However, identifying elements of information (e.g., purchase order number) between records can be used to help compare information. ¬† In addition, isolating out the accrual elements leaves the differences between estimate vs. actual in summary which then can be assessed for materiality. ¬†There is no one-size-fits-all answer here: thus the value of senior accounting professional to design the specific approach.
Ultimately, the Accounting team will work with the Purchasing team to discuss landed costs reasonableness to determine if refinements are required.  This dialog is healthy in a more mature organization that is planning anticipated costs before they are incurred.

Solve your NetSuite Landed Costs Challenge

The practice above does not require workflows or scripting. ¬†However, the power of the NetSuite Platform can easily be summoned to allow for estimated landed costs to be applied during item receipts. ¬†This challenges demonstrates how having a strong accounting background and expertise in NetSuite platform enhancements drives greater profit by lowering operational costs. ¬†That is our core competency: the intersection between accounting and technology. ¬†If you are ready to get more out your NetSuite investment, let’s have a conversation.

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Marty Zigman

Holding all three official certifications, Marty is Southern California's NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 25 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to setup a conversation.

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| Tags: , , , | Category: Accounting, Management, NetSuite | 2 Comments

2 Comments

  1. Rob
    Posted September 19, 2016 at 4:17 pm | Permalink

    Marty-thank you for another excellent write up. Can the same landed cost approach described above be utilized when leveraging the standard costing method or is there another approach I should consider?

    Thanks,
    Rob

  2. Posted September 19, 2016 at 7:58 pm | Permalink

    Hi Rob,

    Here is the challenge with NetSuite Standard Cost when using Landed Cost. If you don’t have assembly modules, anything that is different from Standard cost is plugged as a Purchase Price Variance. Have you exercised the software to see that it will do?

    We are working on a new bundle to produce some automation around this. It will create a mini bill of materials to help drive in all kinds of landed costs. I’ll write an article when ready.

    Marty

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