Are you finding it challenging to precisely calculate your landed costs using NetSuite's native landed cost features? You’re not alone. Because although NetSuite has some useful built-in landed cost capabilities, it can fall short when it comes to managing more complicated scenarios, particularly those involving multiple item receipts or requiring detailed cost allocation.
In this blog, we explore the what and how’s of landed cost distribution and demonstrate how our Landed Cost Distribution Extension streamlines and simplifies this process right in the NetSuite platform.
What is landed cost?
Landed cost distribution - the process of allocating and distributing the total cost of imported goods across various items in an order - is fundamental to international trade and supply chain management. By determining the true cost of an imported product, businesses can accurately calculate their profit margins, set appropriate selling prices, and make informed decisions about sourcing and logistics.
Rather than simply identifying the lowest price at the point of purchase, landed cost allows you to consider the entire journey of the product and all associated expenses, and avoid unexpected costs that could erode profits.
Knowing the landed cost will allow you to account for all the expenses involved in bringing a product to market - from the initial purchase price to the final delivery at the destination and will affect pricing strategies, profit margins, and inventory valuation.
It’s not to be confused with FOB - freight on board or free on board – which defines the point at which the responsibility for the goods transfers from the seller to the buyer and does not include the total costs of getting the product to its final destination.
How do you account for landed cost?
Calculating the total landed cost for imported goods might seem like a straightforward exercise, and in some cases it is. However, it is often far more complex.
The total landed cost includes the purchase price of the goods, but also a variety of additional costs incurred in getting the product to the final destination - think transportation fees, customs duties, taxes, insurance, handling fees, packaging, crating, exchange rates and other related expenses.
The simple formula for landed cost is:
Landed cost = unit cost of product + shipping/freight + customs + risk + overhead.
Let’s look at a landed cost scenario
In this example, a business in Australia is importing electronic gadgets from a manufacturer in Japan.
Breakdown of costs:
Purchase price: 100 gadgets at a unit price of $50 each. Total purchase price is 100 x $50 = $5,000
Freight and shipping: The cost to ship these gadgets from Japan to Australia = $800
Insurance: To insure the shipment = $200
Customs duties: The Australian customs imposes a duty of 10% on the total value of imported electronics. Therefore, the duty is 10% of $5,000 = $500
GST (Goods and Services Tax) rate: The GST rate of 10% is applied to the sum of the purchase price, shipping, insurance, and customs duties. So, GST = 10% of ($5,000 + $800 + $200 + $500) = $650
Handling and storage fees: Costs for handling and storage of the goods upon arrival = $150
Currency Conversion Costs: Convert Australian Dollars (AUD) to Japanese Yen (JPY) for the purchase. Assuming there's a 2% conversion fee on the total purchase price, the fee is 2% of $5,000 = $100
Calculating the Landed Cost:
Now, to calculate the total landed cost, we add up all these expenses:
- Purchase Price: $5,000
- Freight and Shipping: $800
- Insurance: $200
- Customs Duties: $500
- GST: $650
- Handling and Storage Fees: $150
- Currency Conversion Costs: $100
Total Landed Cost = $7,400
Landed Cost per Unit: To calculate the landed cost per unit, divide the total landed cost by the number of gadgets:
Landed Cost per Unit = $7,400 / 100 = $74 per gadget
As you can see, it can be challenging to accurately formulate and attribute costs to individual items in a shipment, and the methods of distribution can vary too. Some businesses allocate costs based on the value of items, while others may use weight, volume, or a combination of factors.
How to calculate landed cost in NetSuite
The NetSuite Inventory Management module allows you to track and calculate their inventory-related expenses, including landed cost. In order to designate, track and add to the value of the inventory item, you will first need to enable the preferences in the software, including the landed cost feature itself.
However, there are limitations to this native functionality. If a landed cost bill is related to multiple item receipts, you must complete a manual calculation outside of NetSuite to find the appropriate distribution per item receipt and edit each receipt with the calculated figures – one record at a time. This is less than ideal for businesses that handle a large volume of imports or have complex supply chains.
Fortunately, the days of calculating landed cost manually are numbered thanks to the arrival of Annexa’s Landed Cost Distribution extension.
What is the Landed Cost Distribution extension by Annexa?
Annexa’s landed cost distribution extension bypasses this manual calculation by dynamically detecting and applying the landed cost values on a bill and distributing them to multiple item receipts – with the user able to specify how the costs should be allocated. This can be based on various factors like the quantity of items, their value, weight, or any other criteria deemed important by the user.
And because it is a NetSuite extension, it seamlessly integrates with your existing workflow, making it easy to adopt without requiring significant changes to the existing processes.
Other features include:
Report on bills for goods not yet delivered
Addresses the scenario where goods have been billed but not yet received. The extension provides a report that displays these bills, making it easy for users to access and apply landed costs once the goods arrive. This pre-emptive tracking helps in better financial planning and ensures timely cost allocation when the goods are eventually received.
Bulk override for item receipts with landed costs
In situations where landed costs have already been applied to item receipts but need adjustments, the extension offers a bulk override featureThis allows users to make changes to multiple item receipts simultaneously, rather than adjusting each one individually.
Customisable search for bills needing landed cost application
Users can customise their search criteria to identify bills that require landed cost allocation. This flexible search functionality makes it easier to filter and prioritise bills based on specific needs or criteria.
Suitelet for filtering item receipts
The Suitelet is included to filter item receipts specifically for the bill that will have landed cost applied. This tool enhances the accuracy of matching item receipts with their corresponding bills, ensuring that the landed costs are applied to the correct items.
Application of landed cost at both bill header and line level
The extension allows for the application of landed costs not just at the overall bill level (header) but also at the individual line item level within a bill. This granularity ensures more precise cost allocation, especially useful when different items in a bill have varying cost factors.
Creation of a log for distributions
For transparency and tracking purposes, the extension creates a log of all distributions for audit trails, monitoring, and reviewing the landed cost applications, ensuring that all allocations are accounted for and can be reviewed if necessary.