IBM Maximo Streamlines Landed Costs Handling

IBM Maximo streamlines landed costs handling, enabling the user to allocate the service costs on the invoice against any or all of the inventory lines.

Adhering to budgets is a challenge to any business. It then follows that keeping track of costs is one of the most important activities to be carried out. To keep a business alive and successful, one needs to not only know exactly what the expenditure is, but also know how it is classified and broken down. Lack of knowledge in this area can lead to inaccuracy in the allocation of cost, unplanned expenses, and depleted profits.

Within the inventory management area, in order to have full visibility of expenses, the landed cost of an item needs to be calculated. Landed costs include not only the basic material and labour expenses but also details on other expenses incurred before the shipment is landed in the final port of destination. This means that all charges incurred to get an item into the warehouse and have it available for use or sale are captured. These charges may include material, subcontracted services, freight, insurance, duty, taxes, and handling charges. A simple example (1) of landed cost calculations is illustrated below.

Example (1)

Quantity Purchase Price Freight Insurance  Landed Cost
1 $100.00 $20.00 $7.50  $127.50

When all mentioned costs are included in the purchase unit price of the item(s), one would automatically have the landed cost allocated to the items straight away at time of receipt. However, when services are paid for separately or against different documents, it’s a bit more complicated.

Capturing landed costs is already a challenging task in itself; imagine controlling and accounting for these expenses! It appears that accounting for landed costs is a common pain point across businesses as there are a lot of factors and variables to be taken into account. Naturally, not all information systems that are used would be adequately designed to handle such a complex process.  Furthermore, some businesses might even choose to stay on a more traditional path and allocate these additional costs manually. Can you see yourself working out all the mathematical calculations required to apportion the costs after looking at a number of purchase orders, receipts, invoices  and stock reports so as to finally get down to entering the adjusting accounting entry? Even if you could picture yourself sorting that out; did you ever consider an alternative that will save you time and effort, to ultimately come up with an elegant, most accurate calculation?

It stands to reason that a good software solution would greatly facilitate this process. It is first required to address a series of questions and have a clear business process in place: Do we directly expense such costs? Do we absorb incurred costs in inventory? If we do allocate such costs to inventory, how do we fairly apportion the costs?

IBM Maximo Asset Management

Maximo handles automatic allocation of standard service costs very well. It enables the user to allocate the service costs (partial or total) on the invoice against any or all of the inventory lines. Upon invoice approval, the system will then prorate the service costs on each item based on the line item’s line cost. A number of conditions exist for this to take place. For instance, the service needs to be set as one that can be prorated.

Read the IBM Maximo Asset Management product sheet.

In the following example (2), both service line costs, amounting to $100.00, are prorated over PO Lines 1, 2 and 3.

Example (2)

PO Line Line Type Quantity Unit Cost Landed Cost
1 Item 1 $100.00 $120.00
2 Item 1 $300.00 $360.00
3 Item 1 $100.00 $120.00
4 Service $25.00
5 Service $75.00

Whilst the Maximo prorating functionality works perfectly when the same supplier is providing both items and the services, it falls short to cater for cases when freight, for example, is offered by another  supplier. When all the services and items are on the same purchase order, it is possible to have all the lines on the same invoice and prorating accordingly within the one document. However, we have sometimes come across scenarios where the client would purchase the goods from one supplier and the freight/insurance services from another, thus getting two separate invoices from two different suppliers; sometimes weeks if not months apart. This is where we come in.

At Computime Software, we have designed and developed a new application within Maximo which can handle landed costs when goods and services are not purchased from the same supplier. In fact, our solution template, called Landed Costs, can even handle instances where a collection of goods are purchased from different suppliers (i.e. a number of different purchase orders) and the freight/insurance cost is received as one invoice from yet another supplier.

Read the Landed Costs product sheet.

The example (3) below shows 3 purchase orders originating from different suppliers; 2 purchase orders depict the acquisition of goods whereas the third one shows freight and insurance service costs, amounting to $100.00. The landed cost per item is then calculated accordingly.

Example (3)

Company PO PO Line Line Type Quantity Unit Cost   Landed Cost
C-03200 PO10000 1 Item 1 $100.00 $120.00
2 Item 1 $300.00 $360.00
C-01459 PO10001 1 Item 1 $100.00 $120.00
C-02891 PO10002 1 Service $25.00
2 Service $75.00

The Landed Costs application allows the user to create a document which is made up of several invoice lines that are split into two categories; Service lines and Inventory lines. The system will then distribute the service line costs amongst the inventory lines using a formula that is derived from the business requirements.