HELP Freight/Carriage In Cost Allocation - Cost Accounting

Dexter5000

Hi all,

I came across an interesting example today which I'm finding a bit of a head-scratcher.

The example was Toms Builders Warehouse, who supply building materials to the trade.

Tom purchases his inventory from multiple suppliers, from which he incurs carriage in costs, which form part of his cost of goods sold in the trading account.

However, Tom does not ship goods to his customers. They collect from the trade counter in his warehouse, meaning Tom is left to absorb all carriage in costs from his suppliers.

The below shows an example purchase order from Tom to one of his suppliers.

Order# 1234

Product X 20 units @ £50.00 each = £1000.00
Product Y 30 units @ £75.00 each = £2250.00
Product Z 40 units @ £100.00 each = £4000.00

Carriage In = £750.00

Net Total - £8000.00

Tom wants to know how to break down the variable cost carriage in and allocate it to each unit of product sold so that he can pass on this cost to his customers. He also wants to know his total landing cost of each unit so he can perform price comparisons with his competitors

Any ideas on how one would go about this?????

Neillaw

I would calculate the total cost of the materials £7,250.
Then divide the carriage costs by the total material charge which would give you a rate which you will allocate as a price per £1.
Then add the total to your cost price. (£50 will become £55.12)

This will then bring you back to your £8k.

You could also do the same exercise on size but you didn't provide any details, this would allocate the cost to the biggest product. The problem with this method is when the biggest item is also the cheapest.

Dexter5000

Thanks for your reply.

Can you show how calculated your rate for allocation? 750/7250 works out at 0.10 .

How would allocate this per £ ?

Thanks again

Neillaw

Actual figure is 0.10344 so rounding 0.10.
Product 1 £50.00 * 1.10344 = Price per product (£55.172)
Product 2 £75.00 * 1.10344 = Price per product (£82.758)
Same for product 3
Then Quantity * new price = Purchase price per batch

Then if you add all the three products together you will come back to £8k give or take rounding's etc.