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Applying Import Costs to a Purchase Order

Last updated 30/06/2022

How to apply Import costs, such as freight fees and customs duty, against Purchases Orders in order to calculate an  accurate landed cost for the products in those Purchase Orders. This article explains in detail how Import costs should be applied to Purchase Orders using the linked transaction functionality.
Refer to this article to understand how Import costs can be entered in a Purchase Order.

Note: Only one method of applying landed costs must be used in a single Purchase Order, either via the linked transaction functionality or via entering it in the Landed Costs section of the Purchase Order. Using both against a single Purchase Order will corrupt the landed cost calculations of that Purchase Order.

Overview


Cin7 calculates landed costs very accurately.

To apply Import Costs to a Purchase Order:

  1. Create a Purchase Order for your products.
  2. Create additional Purchase Orders to match invoices you will receive from your clearance agent, freight forwarder or local customs office.
  3. Link the additional Purchase Orders to the Purchase Order for your products to apply the import costs to each appropriate line item in this Purchase Order.

1 - Create a Purchase Order for your Products


Step one is simple, just create a Purchase Order for your products as usual. This will be referred to as your 'products' Purchase Order.

For more information on how to create Purchase Orders - see Creating a Purchase Order and Purchasing in a Foreign Currency.

2 - Create a Purchase Order for Import Costs


Create a Purchase Order (or Purchase Orders) for your import costs. This will be referred to as your 'import costs' Purchase Order.

We recommend creating separate non-stock products for line items such as Freight and Customs Duty. You will find a 'Freight' non-stock product pre-loaded in your account. Feel free to create additional non-stock products if you require additional line items. For more information on how to do this see the Non Stock section of our article Stock Control Methods.

To create a Purchase Order for import costs:

  1. From the left navigation select Purchase, then click New Purchase Order.
  2. In the contact fields, enter the name of your clearance agent, freight forwarder or local customs office.
  3. In the product grid below, enter the non-stock line items for freight and customs duty on your order.
    To view examples of how this should look, see our examples for Australia, New Zealand, UK and US
  4. Once all the line items have been entered, and the total matches the total of your invoice, approve and save the transaction

3 - Apply Import Costs to the 'products' Purchase Order


Once your 'import costs' Purchase Order has been created and saved, you now need to apply the non-stock line items for freight and customs duty back to the 'products' Purchase Order. To do this:

  1. Make note of the 'products' Purchase Order number - copy to the clipboard if necessary
  2. Open the 'import costs' Purchase Order
  3. Against the freight line item of this purchase order click into the Transactions Link box
  4. Search for nd find the 'products' Purchase Order by entering the full PO number.
  5. Click Allocate to apply the Freight line item to the 'products' Purchase Order
  6. Click Save to confirm, then Save the transaction.
  7. Repeat the process above to allocate the customs duty line item.

Please note that the 'import costs' Purchase Order must have been saved before Transactions can be linked.

If your 'import costs' Purchase Order relates to more than one 'products' Purchase Order, you may wish to divide the import costs between multiple 'products' Purchase Orders. To do this:

  1. Click Transaction Links as shown above for each row.
  2. Search for the first 'products' Purchase Order, then allocate the line item to this 'products' Purchase Order
  3. With the linked transaction box still open, change the Qty field to a percentage (entered as a fraction) of the original quantity of 1. I.e. if allocation 50% each to divide the cost between two 'products' Purchase Orders, change the Qty to 0.5, like so:
  4. Search for the next 'products' Purchase Order, and allocate the next percentage to this 'products' Purchase Order, until you end up with multiple lines, like so:

This method will divide the import costs between the two 'products' Purchase Orders according to the percentages entered. However, if you wish to apply a greater portion of the import costs to one 'products' Purchase Order than the other, you will have to decide on the correct percentages to do this for each line item in the 'import costs' Purchase Order.

Note: You can use different 'products' Purchase Orders and allocation percentages for each line item in the 'import costs' Purchase Order.

Distribution of Costs


Once the costs have been applied, returning to the 'products' Purchase Order, you can select the cost allocation method using the dropdown list in the Landed Costs section.

The amounts used for distribution of the Freight and Customs Duty will correlate to the import costs applied to this Purchase Order from the 'import costs' Purchase Order. Any line item, in the 'import costs' Purchase Order, with 'customs' in the name will be treated as Customs Duty. All other line items including Freight will be treated as Freight.

Cin7 provides a useful report to break down exactly how costs have been distributed for a particular Purchase Order. To view this report, hover over the cog icon in the Purchase Order module and then click Report

See Purchase Order Report for more information.

The total import costs are allocated to the landed cost of the products as follows:

Freight Costs

You can choose how the total freight cost is distributed amongst the products from one of these three different ways:

Method Description
Value This is the default method used - the more expensive items receive a larger portion of the freight cost. This method is most appropriate if all your items have similar weights and dimensions.
Weight This method uses weight - the heavier items receive a larger portion of the freight cost. The weight of each product is specified in the product details page. This method is most appropriate if the weights of your products vary significantly.
Cubic Meters The method uses volume - the larger items receive a larger portion of the freight cost. The volume of each product is specified in the product details page. This method is most appropriate if the size of your products vary significantly.

 

Examples:

A purchase order has two product line items on it with the following details:
- $100 value for Product A with a quantity of 5, weight of 5kg and volume of 2 cubic meters per item
- $200 value for Product B with a quantity of 10, weight of 10kg and volume of 9 cubic meters per item

The total freight paid is $30

Therefore, when $30 is entered as the total freight amount against this Purchase Order, Cin7 will split it and add it to the landed cost of each product depending on the selected distribution method as follows:

For Value distribution method:
- $30 x ($100 / ($100 + $200)) = $10 for Product A
- $30 x ($200 / ($100 + $200)) = $20 for Product B

For Weight distribution method:
- $30 x ((5 x 5) / ((5 x 5) + (10 x 10))) = $6 for Product A
- $30 x ((10 x 10) / ((5 x 5) + (10 x 10)) = $24 for Product B

For Volume distribution method:
- $30 x ((5 x 2) / ((5 x 2) + (10 x 9))) = $3 for Product A
- $30 x ((10 x 9) / ((5 x 2) + (10 x 9)) = $27 for Product B



Customs

The total customs duty amount will be distributed according to the Customs Duty Rate applied against each product line item in the Purchase Order.

Example:

A two product line items on the same purchase order above has the following custom duty rates applied as follows:
- Product A with a 5% customs duty rate applied against it
- Product B with a 10% customs duty rate applied against it

The total customs duty paid is ($100 x 5%) + ($200 x 10%) = $25

Therefore, when $25 is entered as the total customs duty amount against this Purchase Order, Cin7 will split it and add it to the landed cost of each product as follows:
- $25 x (($100 x 5%) / (($100 x 5%) + ($200 x 10%))) = $5 for Product A
- $25 x (($200 x 10%) / (($100 x 5%) + ($200 x 10%))) = $20 for Product B

Refer to this article to understand the setup and how the customs duty amount is distributed.

FAQs

How will my freight purchase appear in my accounting software?

If you are using the Perpetual method of accounting, then those line items that have been applied to other Purchase Orders will be imported as Inventory, and all other items imported as expenses.

If using the Periodic method, all line items will be imported as expenses.

I see your weights and dimensions are in metric - can they be changed to imperial?

We can't change the field description, however if you were to enter weight as pounds or ounces, there is no technical reason why cost distribution shouldn't work, provided you enter the unit consistently across all your products, and the weight is in whole units. The same goes for dimensions.

Can I apply landed costs to a Purchase Order after the receipt of the goods?

Yes, this is possible. To do this, create a new purchase order for the landed costs, click in Transaction Links column and link it to the original purchase order. The landed costs will be applied accordingly.