Inventory Landing Cost & Costing Policy - User Guide

System Configuration & Preferences

Before using Highnix's advanced inventory costing methods and landed cost apportionment features, system administrators must configure the relevant settings under System Setup > System and General GL Setup. These settings determine how inventory costs are calculated, how the cost of goods sold (COGS) is recognized, and how additional costs incurred in purchasing and importing goods are allocated.

The settings are grouped under the Inventory Section.

Inventory Costing Type

The Inventory Costing Type determines how Highnix calculates the cost of inventory issued or sold and the value of the remaining inventory on hand.

Select the appropriate costing method from the dropdown menu:

1. Weighted Average Cost (WAC): Calculates the average cost per unit based on the value and quantity of inventory available. Under a perpetual weighted average system, the average cost is recalculated when new inventory is received. Subsequent inventory issues are valued using the applicable average cost.
2. First In First Out (FIFO): Assumes that the oldest available inventory cost layers are consumed first. Inventory issues are valued using the costs of the earliest remaining receipts, while the ending inventory generally consists of the costs of more recent receipts.
3. Last In First Out (LIFO): Assumes that the newest available inventory cost layers are consumed first. Inventory issues are valued using the costs of the most recent remaining receipts, while the ending inventory generally consists of the costs of older receipts.

Important: FIFO and LIFO are inventory cost valuation methods. They determine which cost layers are used when calculating the cost of inventory issued or sold. They do not necessarily determine the physical movement of goods in the warehouse.

For example, a warehouse may physically dispatch older goods first to minimize the risk of expiry, while the accounting system applies LIFO to determine the cost of the goods issued. Physical stock handling and accounting cost allocation are separate considerations.

Understanding the Impact of Each Costing Method

The selected costing method affects both the cost of goods sold and the value of the remaining inventory. The actual difference depends on the sequence of purchase costs and inventory movements.

For example, assume a company purchases the same product in two batches:

Purchase Batch	Quantity	Unit Cost	Total Cost
First purchase	10	$10.00	$100.00
Second purchase	10	$12.00	$120.00
Total	20	-	$220.00

If the company subsequently issues or sells 10 units, the resulting inventory valuation will differ as follows, assuming no other inventory movements or costs:

Costing Method	Cost of 10 Units Issued	Value of 10 Units Remaining
Weighted Average Cost (WAC)	$110.00	$110.00
First In First Out (FIFO)	$100.00	$120.00
Last In First Out (LIFO)	$120.00	$100.00

This example illustrates the effect of different costing methods when purchase costs change over time. It does not imply that one method will always produce a lower cost of goods sold or a higher inventory value. The outcome depends on the actual sequence of costs and transactions.

Important Considerations Before Changing the Costing Method

Changing the inventory costing method is a significant accounting decision. It should not be treated as a routine system preference change.

• Inventory layer integrity: FIFO and LIFO require the system to maintain the relevant inventory cost layers so that inventory issues can be valued against the appropriate receipts.

• Negative inventory: When switching from WAC to FIFO or LIFO, Highnix enforces a safety validation requiring Negative Inventory Allowed? to be set to No (unchecked). This helps preserve the integrity of the inventory cost layers.

• Existing inventory and transaction history: Changing the costing method does not automatically mean that historical inventory transactions, previously recognized COGS, and financial statements have been fully recalculated under the new method. The treatment of existing stock and historical transactions must be assessed before making the change. The system requires the authorized user's password to effect the change.

• Financial reporting: The selected costing policy should be consistent with the company's approved accounting policy and the applicable financial reporting framework. For example, LIFO is not permitted under IFRS and Singapore Financial Reporting Standards (International). Companies reporting under US GAAP may have different requirements.

• Testing and reconciliation: Before applying a costing change to a live company, test the expected results and reconcile inventory quantities, inventory values, and the relevant general ledger balances.

Recommendation: Before changing from WAC to FIFO or LIFO, consult the system administrator and finance team to determine the appropriate migration procedure. If historical inventory values must be restated, a separate costing migration or historical recalculation exercise may be required.

Inventory Landing Costing Apportion Based On

The Inventory Landing Costing Apportion Based On setting determines how additional costs associated with acquiring inventory are distributed across the items received.

These additional costs, commonly referred to as landed costs, may include:

• International and local freight charges.
• Marine cargo insurance.
• Customs duties and import charges.
• Port handling and shipping-related charges.
• Other directly attributable costs incurred to bring inventory to its present location and condition.

Instead of treating all such charges as ordinary operating expenses, costs that qualify for capitalization may be allocated to inventory so that the inventory valuation and subsequent COGS reflect the appropriate acquisition costs.

Select one of the following allocation methods:

• Product Qty: Allocates the total landed cost according to the physical quantity of each product received. Products with larger quantities receive a larger share of the total charge.

• Product Value: Allocates the total landed cost in proportion to the extended purchase value of each product line. Products with higher purchase values receive a larger share of the total charge.

Example of Landed Cost Apportionment

Assume a company receives the following products and incurs an additional freight charge of $300.

Product	Quantity	Unit Purchase Cost	Extended Purchase Value
Product A	10	$10.00	$100.00
Product B	10	$30.00	$300.00
Total	20	-	$400.00

Option A: Product Qty

The freight charge is allocated based on the quantity received. Since both products have the same quantity, each receives an equal share of the freight charge.

Product	Quantity	Allocated Freight	Freight Per Unit
Product A	10	$150.00	$15.00
Product B	10	$150.00	$15.00
Total	20	$300.00	-

Option B: Product Value

The freight charge is allocated according to each product's proportion of the total purchase value.

Product	Purchase Value	Share of Total Value	Allocated Freight	Freight Per Unit
Product A	$100.00	25%	$75.00	$7.50
Product B	$300.00	75%	$225.00	$22.50
Total	$400.00	100%	$300.00	-

The two methods produce different allocations even though the total freight charge remains the same.

• Product Qty may be more appropriate when costs are primarily driven by the number of units handled or shipped.
• Product Value may be more appropriate when costs are more closely related to the value of the goods being acquired.

The appropriate allocation basis depends on the nature of the cost, the characteristics of the goods, and the company's accounting policy. Where weight, volume, distance, or another factor more accurately reflects how a cost is incurred, a more suitable allocation basis may be required if supported by the system's functionality.

Note: This setting determines the default apportionment basis used by the landed costing process. Users should verify the resulting allocation before posting the transaction, particularly when a shipment contains products with substantially different quantities, values, weights, or handling requirements.

Landing Cost Account

The Landing Cost Account specifies the default General Ledger (GL) clearing or expense account used when recording invoices from external service providers, such as freight forwarders, shipping companies, logistics providers, or customs agents.

This account is used in conjunction with the landed costing process. Its purpose is to provide an appropriate accounting destination for charges that may subsequently be allocated to inventory.

For example, when a freight forwarder issues an invoice for shipping goods from an overseas supplier, the invoice may initially be recorded against the designated landing cost account. When the freight charge is subsequently apportioned to the relevant inventory receipt, the applicable amount can be transferred from the clearing account into inventory, subject to the system's posting workflow.

Clearing Account Versus Expense Account

Although the setting may refer to a clearing or expense account, the intended use of the account should be agreed with the finance team.

• Clearing account: Used to temporarily hold charges that are expected to be allocated to inventory or otherwise cleared through the landed costing process. Amounts should be reconciled against the corresponding landed cost transactions.

• Expense account: Used when the charge is appropriately recognized as an expense rather than capitalized into inventory. Not every freight, handling, or import-related charge necessarily qualifies for inventory capitalization.

The account selected should reflect how the relevant transaction types are posted in Highnix and how the company intends to account for the charges.

Important considerations:

• Ensure that the selected GL account is active and appropriate for the intended transaction.
• Confirm that the account is not being used for an unrelated purpose that would make reconciliation difficult.
• Reconcile outstanding clearing balances regularly to identify invoices that have not yet been allocated or cleared.
• Verify the journal entries generated by the landed costing process before using the feature in a live company.

The Landing Cost Account setting does not, by itself, determine whether a cost qualifies for capitalization. That decision must follow the company's accounting policy and applicable financial reporting requirements.

Configuration and Testing

1. Before implementing advanced inventory costing and landed costing in a live environment, it is recommended to carry out the configuration, testing, and verification on a separate test server. This helps protect the production system from unintended changes during testing.
2. Highnix can provide a separate server for this purpose, available for rent for short term at an additional fee. The test server allows the company to evaluate the new costing method, test transactions, and verify inventory valuation and GL postings without affecting its production environment.
3. The following checks should be completed before implementing the changes in production:Confirm the costing policy: Obtain agreement from the finance team on the appropriate inventory costing method, such as WAC, FIFO, or LIFO, taking into account the company's accounting policy and applicable financial reporting requirements.
   1. Review inventory settings: Ensure that negative inventory is disabled where required by the selected costing method.
   2. Configure landed cost apportionment: Select Product Qty or Product Value according to the company's intended cost allocation policy.
   3. Verify the Landing Cost Account: Confirm that the designated GL account is appropriate for recording and clearing landed costs.
   4. Test inventory transactions: Test representative purchase receipts, inventory issues, sales, and landed cost invoices to verify the resulting inventory valuation and accounting entries.
   5. Reconcile the results: Compare inventory quantities and values against the relevant GL balances, and review any outstanding landed cost clearing balances.
   6. Review historical data: Where an existing company is changing its costing method, assess the treatment of existing inventory, historical transactions, and opening inventory cost layers. Determine whether a historical recalculation or migration exercise is necessary.
   7. Approve the production implementation: Once the test results have been reviewed and approved by the finance team, plan the production implementation, including appropriate backups and reconciliation procedures.
   8. Document the configuration: Record the approved costing method, landed cost allocation basis, GL account, test results, and any relevant migration decisions for future reference.

Important: Inventory costing settings affect stock valuation, cost of goods sold (COGS), gross profit, and financial reporting. They should be configured carefully and reviewed whenever the company's inventory accounting policy changes.

Using a separate test server is particularly recommended when changing the costing method of an existing company, as it provides an opportunity to identify potential discrepancies and resolve them before applying the changes to the production environment.

Recording Goods Receipts (GRNs) with Landing Costs

When receiving goods from a purchase order:

1. Initial Landing Cost (Optional): If freight or shipping charges are known at the time of receipt, enter the lump-sum amount in the Initial Landing Cost (Optional) field.
2. Automatic Apportionment: Upon processing the receipt, the system automatically calculates and distributes the unit landing cost increment across the received items in GRNs based on your selected preference (Qty or Value).
3. If no freight cost is known at the time of receipt, leave the field blank and proceed; landing costs can be added later when the supplier invoice arrives.

Sales, COGS Postings, and Reports

• Dynamic Cost Dispatcher: When sales invoices or deliveries are processed, Highnix ERP automatically references your active company preference (WAC, FIFO, or LIFO) to evaluate the true acquisition cost (Base Cost + Landing Cost) on the fly.
• GL Postings: Sales transactions post the appropriate debits to Cost of Goods Sold and credits to Inventory Asset based on the evaluated cost layers.
• Contribution Analysis: The native Inventory Sales Report automatically reads the updated base and landing costs stamped on outbound stock movements, ensuring that Sales, Cost, and Profit Contribution margins are accurately reported.