Allocating Landed and Freight Costs

The following allocation examples illustrate how the amounts to be allocated to inventory are calculated using the Quantity, Weight, Volume, and Cost allocation methods. In each example, assume that a landed cost or freight amount of $100.00 has been entered for the receipt of inventory items A and B. In addition, the base inventory value of each line (the amount that is posted to inventory if no freight costs are allocated) is the same in all three examples.

The amount of freight cost allocated to inventory is calculated by adding the freight amount and the prepaid freight amount. Landed cost amounts are taken directly from the Landed Cost Entry feature, available in the Receipt of Goods Entry window. In the following examples, assume that only a freight amount or a landed cost amount has been entered for the receipt of inventory items A and B.

The following are allocation methods:

Allocation by Quantity

You can allocate landed or freight costs by the quantity of items received in either or two ways: by selecting Quantity per Item in the Allocate Freight on a Line Item Basis field in the Purchase Order Options window, or by selecting Quantity in the Allocation Method field in the Landed Cost Type Maintenance window. In Receipt of Goods Entry, the quantity of all items received on each purchase order is totaled. This total is used to determine the amount of landed or freight cost to be allocated to the unit cost for each item.

The following table illustrates the calculation of the base inventory value, the landed cost or freight amount allocated, the total inventory value (the amount posted to the Inventory account), and the new unit cost for each line item.

Line Item	Quantity per Item	Unit Cost	Base Inv. Value	Freight Amt. per Line 1	Total Inv. Value 2	New Unit Cost 3
A	5	$10.00	$50.00	$20.00	$70.00	$14.00
B	20	$7.50	$150.00	$80.00	$230.00	$11.50

Calculations:

1 The freight amount per line is calculated by multiplying the freight amount by the quotient of the quantity per item divided by the total quantity of all line items, as illustrated below.

Line Item A:	$100.00 x (5 / 25) = $20.00
Line Item B:	$100.00 x (20 / 25) = $80.00

2 The total inventory value is calculated by adding the base inventory value and the freight amount per line, as illustrated below.

Line Item A:	$50.00 + $20.00 = $70.00
Line Item B:	$150.00 + $80.00 = $230.00

3 The new unit cost per item is calculated by adding the original unit cost to the freight amount per line divided by the quantity per item, as illustrated below.

Line Item A:	$10.00 + ($20.00 / 5) = $14.00
Line Item B:	$7.50 + ($80.00 / 20) = $11.50

Allocation by Weight or Volume

The Weight and Volume allocation methods use the same calculation method; therefore, the following tables and calculations apply to both methods of allocation. To allocate landed or freight costs by the weight of items received, Weight must be selected in the Allocate Freight on a Line Item Basis field in the Purchase Order Options window. In Receipt of Goods Entry, the weight of all items received on each purchase order is totaled. This total is used to determine the amount of landed or freight costs to be allocated to the unit cost for each item.

The following table illustrates the calculation of the total weight per line, the landed or freight amount allocated, the total inventory value (the amount posted to the Inventory account), and the new unit cost for each line item. It is assumed that the unit weight for item A is 4 pounds and the unit weight for item B is 1.5 pounds. The original unit cost is the same as in the previous example ($10.00 for item A and $7.50 for item B).

Note Items without weight or volume amounts will not be included in the allocation.

Line Item	Quantity per Item	Total Wt. per Line	Base Inv. Value	Freight Amt. per Line 1	Total Inv. Value 2	New Unit Cost 3
A	5	20 lbs	$50.00	$40.00	$90.00	$18.00
B	20	30 lbs	$150.00	$60.00	$210.00	$10.50

Calculations:

1 The freight amount per line is calculated by multiplying the freight amount by the quotient of the total weight per line divided by the total weight of all line items, as illustrated below.

Line Item A:	$100.00 x (20 / 50) = $40.00
Line Item B:	$100.00 x (30 / 50) = $60.00

2 The total inventory value is calculated by adding the base inventory value and the freight amount per line, as illustrated below.

Line Item A:	$50.00 + $40.00 = $90.00
Line Item B:	$150.00 + $60.00 = $210.00

3 The new unit cost per item is calculated by adding the original unit cost to the freight amount per line divided by the quantity per item, as illustrated below.

Line Item A:	$10.00 + ($40.00 / 5) = $18.00
Line Item B:	$7.50 + ($60.00 / 20) = $10.50

Allocation by Cost

To allocate landed or freight costs by the cost of items received, select Cost per Item in the Allocate Freight on a Line Item Basis field in the Purchase Order Options window. In Receipt of Goods Entry, the cost of all items received on each purchase order is totaled. This total is used to determine the amount of landed or freight costs to be allocated to the unit cost for each item.

The following table illustrates the calculation of the base inventory value, the landed or freight amount allocated, the total inventory value (the amount posted to the Inventory account), and the new unit cost for each line item.

Line Item	Quantity per Item	Unit Cost	Base Inv. Value	Freight Amt. per Line 1	Total Inv. Value 2	New Unit Cost 3
A	5	$10.00	$50.00	$25.00	$75.00	$15.00
B	20	$7.50	$150.00	$75.00	$225.00	$11.25

Calculations:

1 The freight amount per line is calculated by multiplying the freight amount by the quotient of the base inventory value divided by the total base inventory value of all line items, as illustrated below.

Line Item A:	$100.00 x (50 / 200) = $25.00
Line Item B:	$100.00 x (150 / 200) = $75.00

2 The total inventory value is calculated by adding the base inventory value and the freight amount per line, as illustrated below.

Line Item A:	$50.00 + $25.00 = $75.00
Line Item B:	$150.00 + $75.00 = $225.00

3 The new unit cost per item is calculated by adding the original unit cost to the freight amount per line divided by the quantity per item, as illustrated below.

Line Item A:	$10.00 + ($25.00 / 5) = $15.00
Line Item B:	$7.50 + ($75.00 / 20) = $11.25

For more information, see:

Landed Cost Type Maintenance

Allocate Freight Costs to Inventory Without Landed Costs

Landed Cost and Freight FAQs