Late freight: 4 steps to update posted material cost

Key takeaways

• Match the freight invoice to the original purchase and goods.
• Check for freight already included before adding the charge.
• Check affected sales and stock on hand after adjustment.
• Reconcile the allocated amounts with the invoice and accounts.

A purchase is posted when the goods are received and the vendor's bill is recorded. The material cost on the item is then set from that purchase. A freight invoice for the same goods can arrive afterward, and it can arrive after the goods have already been used or sold. When that happens, the cost on the record leaves out the freight, and someone has to bring it in.

In this post, the material cost means the cost recorded on the item for the goods you bought. Freight means the charge for moving those goods to you. Posted means the entry has been recorded in the books. Freight is part of what it costs to get material to the place it will be used, so a record that leaves it out understates the material cost, and every report that uses that cost inherits the gap.

This post gives four steps for adding late freight to a material cost after the purchase is already posted. The steps are general practice. The specific rules, amounts, and dates in this post come from one source, Microsoft's cost adjustment documentation for Business Central. Those examples describe Business Central. Your accounting or estimating system may handle a late charge in a different way, so check its own documentation before you copy any part of the approach.

Two groups of readers will use this most. Estimators need the cost history behind future bids to show the full cost of the material. Owners need to know whether a job that has already sold still shows the margin they expected. The four steps cover the posting work, and they leave a trail that both groups can check. For the estimating side, see the material cost line checks.

A good habit is to leave the original purchase as it was posted. The freight then goes in as its own entry that points back to that purchase. Anyone reviewing the record can see what was posted first and what was added later, and that makes questions easier to answer.

Step 1: Find the posted purchase the freight belongs to

The freight belongs to the posted purchase it was charged on, so find that purchase before you change anything.

Open the posted purchase and write down five things: the vendor, the item, the posting date, the quantity received, and the unit cost that was posted. Keep this list with the freight invoice. You will refer to these details in each of the next steps, and it is much easier to gather them before someone is waiting on an answer.

Pull any shipping paperwork you have as well. The purchase order, the receiving record, and the freight invoice should have a traceable connection to the same purchase and goods. If they do not, stop and find out why before you post anything. A mismatch is easier to sort out before the charge is in the accounts than after.

Then open the freight invoice and compare it with the purchase. Check that it names the same goods, and record when it arrived separately from its invoice date. If the invoice covers goods from more than one purchase, decide how to split it before you post anything. Splitting is a judgment call, and it depends on what the freight was for and how the goods were shipped. One option is to spread the freight across the units received. Confirm the allocation method with whoever keeps your books.

The order of events matters too. Microsoft's documentation for Business Central walks through a sequence of this kind. It starts with this entry: "On January 10, you post a purchased item as received and invoiced." Next comes a sale of the same item: "On January 15, you post a sales order for the item as shipped and invoiced." Then the freight arrives: "On February 5, you receive an invoice for a freight charge on the original purchase." In that example, the freight comes after both the purchase and the sale.

You can ask the same question about your own records. Was any of the item sold before the freight invoice arrived? If so, check the sale adjustment in step 3. If none was sold, check the item cost; for goods consumed on a job, confirm your system's treatment with whoever keeps the books. Write down the answer either way, because a reviewer will ask.

Estimators should also note which bids or job cost reports used the purchase price. You do not need to change those yet. You do need to know they exist, so that the freight does not later appear to be missing from a number someone has already relied on.

Keep the freight invoice itself on file with the purchase. Use the invoice to establish the billed charge and payment records to establish what was paid and when; your note from this step connects the charge to the purchase.

Step 2: Record the freight as a charge tied to the original purchase

Record the freight as a charge related to the original purchase, so the entry points back to the item instead of standing alone.

Use the example to see the shape of the entry, not its numbers. The date on the example's charge is also the example's date. Use the invoice date on your own freight document.

In the example, the charge is posted first, and the cost adjustment comes after it. Step 3 follows that same order. Do not run an adjustment before the charge is in place, because the adjustment has to pick up the charge.

When you enter the charge, check three things against the freight invoice. The amount should match the invoice. Check the freight invoice currency and your system's conversion treatment. The charge should reference the original purchase, not a new purchase of the goods.

Also check that the freight is not already in the purchase cost. If part of the freight was included when the purchase was posted, adding the full invoice again would count it twice. This is worth checking when a freight bill arrives late, because the invoice looks new even if part of its cost was already captured.

In that case the material cost on the item will not show the freight, even though the money was spent. Ask the person who keeps the books where the charge will land before you post it. Whichever way you choose, write a short note that gives the reason for the charge, the name of the person who approved it, and the purchase reference.

An owner may ask why the cost of a material moved after it was already reported. A clear note at this step answers that question before it is asked.

Attach the freight invoice to the charge if your system allows it, and write the purchase reference on the invoice itself. A reviewer who sees the invoice, the note, and the charge together can check the entry without having to call anyone.

Step 3: Adjust the cost of any sale that already used the item

If any of the item has already been sold, the late charge can change the cost of that sale, so adjust the sale as well as the stock on hand.

Microsoft's example shows how this works in Business Central. It says that "the cost adjustment batch job adjusts the cost of the sale by -2.00 LCY accordingly." In the example, the sale was posted on January 15, and the related charge is the 2.00 LCY item charge from step 2.

The figure is negative in the example. Check the sign convention in your own system before you copy the entry. Getting the sign wrong would misstate the cost of the sale.

For an owner, this is the step where the cost of a sold job can move. The margin you reported on that job may change as a result. Tell the owner which job or sale was affected, the amount of the adjustment, and the date you posted it. A short list of affected sales is useful here, because the same freight can touch more than one sale if the goods were sold in several lots.

If none of the item has been sold, there is no sale cost to adjust. Check the item record directly instead, and confirm that the cost on hand reflects the freight from step 2. Do not assume the adjustment happened just because the charge was entered. Look at the record.

Partly sold stock needs the most care. If some units were sold and some are still in stock, the sold part is the part that may need the adjustment, and the rest of the freight should stay with the units on hand. Follow your system's costing and cost adjustment method for this split, separately from allocating freight across purchases. Write down how you divided the freight, and reconcile the additional sale and stock adjustments plus freight already recorded to the invoice total.

Estimators should treat this step as a check on their cost history. An old cost that stays in the history can distort the next estimate if that history feeds it. Decide with the estimating lead whether the updated cost should feed future bids. Past bids are a separate question, and it should be answered on its own. For related pricing checks, see markup and margin rates.

Illustrative example: Reconcile partly recorded freight

Using illustrative amounts in the same currency, a freight invoice totals 20, with 10 already included in the purchase cost. The additional charge is 10. Suppose the applicable costing method assigns 5 to sold goods and 5 to stock on hand. The additional allocations total 10; together with the previously recorded 10, they reconcile to the invoice total of 20. These amounts illustrate the check, not an allocation rule.

Step 4: Post the new cost to G/L and check the result

Post the adjusted cost to G/L, then reconcile the sale and remaining inventory allocations with the freight recorded in the accounts.

The posting step is a separate action from the adjustment. Microsoft's example ends with the Post Inventory Cost to G/L batch job posting the new value entries to the accounts. Keep this step on your checklist so you do not assume the accounts have the change because the item record does. The two can look right on their own and still disagree if one was not posted.

The documentation also explains the relation between G/L entries and item entries. If you need to trace how accounting entries link to item entries, that section is the place to start in the documentation. Read it before you correct a mismatch by hand, so you know which entries are linked.

Before you close the job, run through this list:

• The item record shows its allocated freight cost, with the amount traceable to your own freight document.
• Any sale affected by the freight shows the adjusted cost, and you have checked the sign against your system's convention.
• The accounts show the freight amount, and the total matches the freight invoice.
• The charge references the original purchase, and it is not counted twice with any freight already in the purchase cost.
• The notes explain why the charge was added, who approved it, and which sales or jobs were affected.
• The estimating team knows whether the updated cost should feed future bids.

Each item on the list is a question someone may ask later. If you can answer all of them from the record, the late freight will not cause confusion when the next report runs.

If a check fails, go back to the list you made in step 1 and compare it with the freight invoice line by line. Do not adjust the original purchase to make the numbers agree. Find the entry that differs, correct that entry, and then run the checks again. Have a second person review the entries against the freight invoice before the period closes, because a fresh look can catch a wrong vendor, a wrong date, or a charge tied to the wrong purchase. If the period is already closed, tell the owner before you post, because a late entry changes a figure that was already reported.

For estimators, the most useful result is a cost history that matches the freight invoice and says clearly which entries changed. For owners, the most useful result is a sold job whose reported margin can be explained by a dated note, a charge, and an adjustment. Both groups benefit from the same record, so keep one copy of the notes that everyone can open.

Your next step today

Choose a late freight invoice and gather its purchase record and shipping paperwork before entering the charge.

Questions about late freight

Must the freight invoice be dated after the purchase?

No; record its arrival separately from its invoice date when checking the sequence of events.

Does the full freight charge belong to a sale?

Not always; partly sold stock needs an allocation between affected sales and the units still on hand, following your system's costing method.

How do you avoid counting freight twice?

Check how much freight is already in the purchase cost before recording the additional charge.