Cost of goods in bonded storage

Instead of starting a new thread I thought it was better to add to this old post of mine. But maybe I have to move the question to a new thread?

There is an issue I face with COGS and Average Cost in connection to Quantity on Hand and Quantity to Receive. I am pretty sure that Manager calculates Average Cost based on both quantities (on Hand + to Receive). This creates no issues if the COGS is only based on the actual cost of the products. In our case though COGS is also based on transport and import duties which we pay once the goods arrive (transport) and once the goods are cleared from customs (duties).

The issue is that often we have Purchase Invoices (and we pay them) for the goods themselves and transport but the goods stay in a bonded warehouse for some time. This means that until all goods are cleared we cannot have a precise picture of the Average Cost of items as one part of the costing is missing (duties). Hence the Average Cost will always be lower than what we expect it to be once also duties on the remaining part of the goods are paid for.

This becomes a problem when some of the goods are held in bonded at the end of the year as we need to file our accounts for tax purposes and the COGS will appear lower than it should be (hence we pay more taxes as our profits appear higher, though we “catch up” the following year when the goods are cleared and the Average Cost increases).

I wonder if there is a way to manage this in Manager, i.e. have it to calculate the Average Cost and COGS only on the Quantity on hand.

@mauroskov, I moved your post to a new topic. It was not closely related to the one where you posted it.

I do not understand your concern. Cost of goods sold (represented in the default account Inventory - cost) is not determined or posted until the inventory items are sold. By definition, something in bonded storage has not yet been sold, so there will be no entry. Therefore, at the end of the year, inventory in storage—either fully received or still in bonded storage—does not affect your profits. In the situation you describe, the value of Inventory on hand will include the purchase price and transport costs for items in bonded storage, which are the true value of the asset at that time.

Once the items leave bonded storage and you have paid duties, the value of Inventory on hand will increase. When you subsequently sell the items, cost of goods sold will be determined by the value with duties.

It is a bit of a complicated issue. I have specific cases where the current Average Cost is very close to the selling price, which affects profits. But when I look at the Profit Margin Report for the whole period during which the same items were purchased and sold (more than 1 year span) the profit is in line with expectations.

For example, we have an item that we purchased for the first time in June 2019 and we received in a bonded warehouse. We cleared it from bonded in four different tranches over the following six months. In between those tranches there were sales to customers.

This means that when we cleared it the first time the cost was something like this:

288 X unit price of the item
plus 288 X unit transport cost
plus Duty paid on 90 pieces

This means that the Average cost was lower than what it would have been if we had cleared the whole stock (288 pieces). In fact duties were paid on only 90 pieces but the duty cost was spread on all 288.

When we cleared the same item, after selling 60 pieces from the stock that had already been cleared, the Average Cost calculated by Manager was:

228 X the unit price of the items (288 - the 60 sold)
plus 228 X unit transport cost
plus duty paid for the first clearing for the remaining 228 pieces
plus duty paid on another 90 pieces

As you can imagine, the value of the duty (more or less the same as the one paid during the first clearing) was now distributed on 228 pieces, not 288, hence a higher impact of duties on the remaining quantity of 228.

The same happened then the third and the fourth clearing, where the cost of duty was attributed to a smaller and smaller quantity, hence a higher Average Cost.

This means that for the pieces sold between June 2019 and December 2019 the COGS was initially lower (and getting slowly higher because the impact of duties was spread on the higher number of pieces). Whereas now the remaining pieces in stock have a much higher Average Costs attributed to them because the last duties paid were distributed only on smaller quantity of stock remaining while they also carry forward some of the old duties paid before.

I hope this makes sense and explains my doubt about the way Average Cost (and hence COGS and hence profits) changes over time due to the process I have illustrated.

This is the key. By the time all units are cleared from bonded storage and sold (assuming no more purchases), the overall cost of goods sold will be the same as if everything was cleared at once. Perpetual moving average cost inventory valuation has several advantages and disadvantages, as do other methods. One disadvantage is that it produces uneven interim average costs when the full costs of a purchase are not recorded simultaneously and cannot, therefore, be distributed across the full lot at once.

In your example, you will sell some units at a higher cost of goods and others at lower. But the differences will work themselves out over time. For further discussion, I suggest an internet search about perpetual moving average cost valuation. There are many resources.

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Standard costing is perhaps the solution to this. If you know the duty amount, you can create accruals based on the standard cost ie a specific percentage of the inventory and then settle the invoices from the accruals.

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@applet can you elaborate a bit on this, and maybe on how to use this system with Manager?

Check this guide. We use this in our business for freight and brokerage costs. Similar approach can be used for customs charges.