One of the common things we have encountered here in support is how to account for additional costs from vendors such as shipping charges. For example, you may have received items from your vendor on January 1 but then a month later you get an invoice from the shipping company charging the additional cost.
What you want to be able to do is enter that invoice and prorate the costs amongst the items that exist on that receipt.
This blog post outlines the steps in setting up an additional cost in Purchase Order and how to prorate additional costs to items on a receipt when that item has already been recorded as being received in the system.
To set up an additional cost, you would navigate to P/O Setup then click on Additional Costs.
When you set up an additional charge, like say a shipping charge, if you specify a vendor number when setting up, then only that vendor can charge that additional cost. If you leave it blank then any vendor can use that charge.
After you specify the value of the additional cost, you need to determine whether it is to be prorated or not. If you choose No Proration, this means that the cost will be expensed. If you select this, then you must specify the general ledger expense account number for the cost and will not be added to the cost of the item.
If you choose to Prorate, you have four options to Prorate By:
- Quantity – the additional cost will be distributed or allocated equally to the items you purchase based on the quantity.
- Cost – the additional cost will be allocated or prorated to the items purchased on the purchase order based on the cost of the individual items.
- Weight – the additional cost will be allocated or prorated to the items purchased based on the item weight on the detail line of the receipt.
- Manually –You will need to manually calculate the proration amount and assign it to the items.
Let’s see this in action. First off, go to Purchase Orders then to P/O Transactions. Next we will click on Receipt Entry. In our example, we will receive 10 fluorescent desk lamps into location 5 at a cost of $20 each. So the value of this receipt will be $200 in location 5. We then receive an invoice from FedEx charging you a shipping fee for the fluorescent lamps and now we want to prorate that additional cost to items on that receipt.
In the PO module, we will go to Invoice Entry. It is important that the invoice has been originally entered in the PO module for that third party vendor. Another thing to note is you must select the vendor number second and not the receipt number. The vendor in this case is the one charging the additional cost. In our example it is FedEx. If you selected the receipt number second, then you would be unable to prorate the additional charge against that invoice.
In our example, we are going to select the vendor as FedEx and our receipt number would be the one where we received the 10 fluorescent lamps into inventory. In the Invoice total field, we will put in $100.
Under the Additional Cost tab, we will then add the additional shipping charge of $100. It is important that the Additional Cost tab total equal what is inputted in the Invoice Total field. If not, you will see the following error message:
Next, select the appropriate proration method that we noted above.
If you selected a proration method, then you will need to select the appropriate re-proration method:
- Leave: You want to leave the additional cost that was allocated to the items being returned with the item number. This option will take the additional cost and apply it to any “other” items that exist. If there are none, then this option will result in a negative cost for the item.
- Prorate: You want to prorate the cost of the items being returned across to the other items that were on the original receipt. If there were none, then it will leave the additional cost with the item number being returned.
- Expense: You want to assign the prorated amount of the items being returned directly to a general ledger expense account.
You also have the option to select No Proration. Remember that if you select this then you must specify the expense account that the additional cost will be expensed to.
After you post the invoice and run Day End Processing, you can see that the cost has been prorated by looking at the item’s location details.
In Accounts Payable, it shows that we owe FedEx $100.
In the General Ledger, you should see that the Inventory account got debited $100 while the AP Clearing account got credited $100.
Now, if the goods on the item were shipped before the additional costs were invoiced and prorated to those items then the additional cost would remain with the item. For example, you received in 5 widgets and then shipped them all that same day. You then received the freight bill for $100 and then prorated the additional charge to that item. However, you have zero items on hand worth $100.00. You would address this by doing a COST ONLY adjustment via IC Adjustments to zero out the inventory value where we will see debits to COGS and a credit to Inventory.
If you have any questions on how to set up Additional Costs, sound off in the comments.
