How to manage Average Landed CostsFollow
What is the Average Landed Cost?
- Average Landed Cost (ALC) is the value of your products calculated using the average costing method which is the core costing methodology used by Unleashed.
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What is included in your Landed Cost?
The costs incurred in transporting an item from the place of purchase to your premises. These might include: freight, insurance, duties, and so on. Landing costs should be included in the value of the stock; e.g. you might pay $100 to your supplier for an item, but it also costs a further $50 in freight.
How is Average Cost calculated?
The Average Landed Cost (ALC) is calculated based on the purchase price, any other costs associated with getting the stock to you (excluding taxes) or any other transactions you carry out for a product like stock adjustment, assembly, etc. It works based on a product's current total stock on hand quantity and total stock value.
Average Landed Cost (ALC) = Total Stock Value/Total Stock Qty
No stock =no Average Landed Costs, i.e 0/0=0.
If you have 0 stock on hand qty for a product, its average landed cost will also be 0 by default. In this case, we will look at the "last cost" of that product to compute profit and margin.
Margin = % (unit sell price - ALC) / unit sell price
Margin = % (unit sell price - Last cost) / unit sell price
John is an alcohol wholesaler. He purchases alcohol at the wholesale price and sells it to customers for a 15-20% markup; he arranges purchase delivery and finds the best prices he can. The price of Canadian Rum has been fluctuating quite a bit for some time.
On the past three occasions, John has purchased:
- 12 bottles for $30
- 6 bottles for $32
- 50 bottles for $25.
The following screenshot shows the results of the 3 occasions which John had purchased.
Any transaction that brings stock into your inventory will have an effect on your Average Landed Cost and the stock value as a whole. The more accurate you are with costs/prices at the start of a product's lifespan in Unleashed, the better it will be for reporting and the more understanding you’ll have of this product's contribution to your business.
Do note that the following transactions can affect the average cost of a product:
- Import Stock on Hand (first time, only for new products)
- Receipting Products
- Stock Adjustments
- Stock Count
- Stock Revaluation
- Supplier Returns
- Credits (when stock is being returned).
When you use the Import stock on hand CSV file to set up your initial stock and value - please note this import is used for NEW products only - you would give an initial average landed cost to your products which will then be changing in time once more stock for such products is purchased or stock adjusted in, etc.
On a Purchase Order, the Average Landed Cost is calculated on a Purchase Order by using the Line Total + the proportion cost added to the Purchase Order. This means that Unleashed proportionally distributes the Cost lines over all products on the order. You can always re-distribute these cost values on your ordered products via the editable Costing Total column so long as the Purchase Order is open.
For instance, if you had multiple lines of products and you only wanted the costs associated with one product, you could manually edit the amounts displayed in the column Costing Total.
Stock Adjustments not only remove or add physical stock but also stock value. With every addition/removal of stock, you can add/remove a value of that stock- thereby changing the Average Landed Cost; as ALC=total stock value divided by stock on hand.
You can always just add/remove stock value without adding/removing any stock:
The stock count function computes the value of added or removed stock based on their Average Landed cost. If the updated product had some quantity present in the system at the time of stock count is completed, we will look at its average landed cost to update the stock value.
If the updated product had 0 quantity present in the system at the time of stock count is completed, its average landed cost would automatically be 0. In that case, we will look at its Last cost to update the stock value.
Finally, if any of the products you updated had 0 value for the average landed cost or last cost, their value in the system will also be 0 even if you have some stock quantity added for them.
A purpose of a Stock Revaluation Import is to change the Average Landed Cost of an existing product. You can find more information about how to perform this import by scrolling down to the "How to change Average Landed Cost".
Unleashed uses each component product's Average Landed Cost to populate the unit cost in the assemblies. Unit Cost + Proportion Assembly Cost/Products = Average Landed Cost
For instance, if you wanted to add any manufacturing or labor costs to the assembly, these can be added as Supplier Costs OR as a Never Diminishing product, and the cost would be included in the Total Assembly Cost. The ALC of the components and the costs associated with the final assembled product will determine the total Average landed cost of the assembled product i.e. the Total Assembly Cost which will help to determine the assembled products' Average Landed Cost- which is later used in Sales Orders to calculate margins.
Supplier Returns & Credit notes (when stock is returned) use the Average Landed Cost of a product returned at the time of the supplier return/ credit note is completed.
For instance, if you raise a credit note to credit back something you sold a year ago which has now a different landed cost from when you sold it, it will be brought back in at the current landed cost, not the cost at the time of sale was completed. This is due to the nature of the average landed cost being an ever-changing value and the most accurate value of your stock would be the latest / most recent value.
In the above scenario, if you are connected to accounting software such as Xero and Quickbooks Online, we would recommend you make your accountant aware of any changes and/or if you are noticing a discrepancy that would affect your current stock value.
Where to check the Average landed cost of your products
You can review the Transactions tab of a Product record for the transaction history of your product's Average Landed Cost (ALC) and how the value has changed in time;
Similarly, the Costs tab of a product record will show you the latest current Average Landed Cost as well as other useful information as the Pre Avg Cost, which displays the pre-average costs for the specified transaction. (The Average Landed Costs prior to the transaction), and the Post Avg Cost which displays the post average costs for the specified transaction. (The Average Landed Costs after the transaction).
How to change Average Landed Cost
If your current Average Landed Cost for a product doesn't look right, you can update via a stock revaluation import (recommended) OR via a value-only stock adjustment. For steps on how to perform either of the two options, please go to How do I update my products' Average Landed Cost.
If you are Tax registered, then it does not affect your costs.