Finding the cost of imported goods (itemized)

Discussion in 'Growing and Managing a Business' started by ebarnichta, Oct 17, 2011.

  1. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    Hello,

    I would like to know what is the best way of costing imported goods with various different items.

    For example, I have put my first order of toys from China. The total order has 18 different variety of toys and I have tried two different ways of finding the cost of these items, with two very different answers.

    As a simpe example:

    Toy 1: US$5.00 QTY: 2000 Total: US$10,000
    Toy 2: US$7.50 QTY: 2000 Total: US$15,000
    Toy 3: US$8.00 QTY: 2000 Total: US$16000
    Toy 4: US$10.00 QTY: 2000 Total: US$20,000
    TOTAL COST FOB: US$61,000

    Freight: $4200 x 2x40HQ Total: $8400 (Each container has a mixture of items)

    Total Cost: $69,400

    (For sake of simplicity and example, I will leave out any duty/tax calculations).

    What is the best way to find the cost of EACH different toy?

    Thanks!
     
  2. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    Or please send me the direction I need to go (online or anything). I have searched the internet for books and websites that would help me on this specific matter with no luck.
     
  3. Dorfy

    Dorfy
    uix_expand uix_collapse
    Member

    Joined:
    Aug 11, 2011
    Messages:
    88
    Likes Received:
    22
    I think people are not replying because the math is so easy.

    8000 toys shipped at cost of $8400 = $1.05 per toy. = 8400/8000

    Thats the easiest way.

    You could also work out what percentage of cost of each batch of toys represents as a percentage of the total shipping cost and go from there, but in effect the cost per toy is so minimal as to not worry about exact costs.
     
    • Like Like x 1
  4. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    Thanks Dorfy.

    I was actually doing it calculating the percentage of each batch to the total percentage and applying the costs and dividing, etc.

    But then someone else came along and told me that this wasn't right and there is another simpler way of doing it, which mathematically seemed a bit off.

    The way this person explained to me was close in some items, but way off in others, in the toy example. But when I pulled up another cost analysis of an order that was only ONE item, it was spot on to my cost analysis. So, it got me a bit confused and thinking I was maybe doing it wrong.

    Here is that the other person proposed:

    Take the Total Amount + Costs and Expenses x Exchange Rate (I am in the Dominican Republic) and divide by the Total FOB price. This gives you a "factor" that then you multiply every item's FOB price with and that gives you the final cost.

    In my example:

    Total Cost in US: US$103,505
    Exchange Rate: 38.35
    Total FOB price: $56,076

    So, (103,505 x 38.5) / 56,076 gives you a "factor" of 71.06, which you then multiply evey FOB item's price with this number.

    Have you, or anyone else, ever heard of this method before?

    Elias
     
  5. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Ebarnichta, I'd generally go with Dorfy's recommendation of spreading the transportation costs evenly to all units (total cost / total # units). As Dorfy mentions, you wouldn't wanna burn too much time on a more sophisticated allocation methodology, when the freight costs are a relatively small player in the total cost picture.

    But since trans costs are generally a function of weight and/or volume, if you happen to know that certain of the toys are inducing a disproportionately large percentage of the shipping costs, due to being much bulkier and/or heavier than the other toys, then you might consider weighting the allocation a bit in order to charge those toys with a larger share of the trans costs, pro rata. But again, don't spend time getting fancy with it if the per-toy allocation is pretty small regardless.

    I'm sorry, I'm not sure where you were headed in that last part. I see your translation from USD to DOP, but then I'm afraid I don't follow after that. Could you clarify just a bit? Thanks.
     
  6. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    ArcSine, in the example the allocation is small. I chose a fairly simple example just to get the overall idea through. However, in the real case scenario I have to factor in many other expenses (such as duty tax and other taxes).

    As per the last part, I can definitely try to clarify.

    My total cost for this in USD was $103,505 (after freight, taxes, etc) . My FOB China total cost in USD was $56,076. My USD:DOP Exchange Rate is 1:38.35.

    What the person was claiming that the correct or better way to do it, was by finding this number and multiplying every item with this number to get my final price.

    The formula being: (Total Cost x Exchange Rate) / FOB Total Cost

    So, (103,505 * 38.35) = 3,969,416.75 / 56,076 = 70.79. If an item costs FOB $2.05, my final cost would be 2.05 x 70.79 = DOP$145.11.

    Like I said before, in some cases it was fairly close, in others it was way off. In a one item order it was spot on with my other calculation.

    I had never heard of this method of calculating cost before. Maybe my best bet is just to forget this guy ever came into my office, as I was doing it fine before he ever did.
     
    #6 ebarnichta, Oct 17, 2011
    Last edited: Oct 17, 2011
  7. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Gotcha. The difference is that the other person's method spreads your other costs (duty, trans'n, taxes) across the units based on their relative price, whereas the method you probably used spreads the costs pro rata to all units. The items don't all have the same FOB cost, hence the differences you're seeing. I'd be willing to bet that those items for which the two methods produced similar results are those items having an FOB cost that's somewhere in the middle of your cost range of all items, while for those items at the high and low ends of your cost range, you saw the bigger differences as between the two methods.

    Which method does the better job of capturing the economic realities of your situation, is up to you.

    Simple example, disregarding the currency translation for a moment. You buy two items, one with an FOB cost of 10 and another with an FOB cost of 30. Freight, taxes, et. al. amount to 5. A simple pro-rata allocation would give 2.50 of the post-FOB costs to each item, producing final costs for the two items of 12.50 and 32.50, respectively.

    Your friend's allocation model, on the other hand, would cost the first item at 45 / 40 x 10 = 11.25 and the second at 45 / 40 x 30 = 33.75. (Your friend was kind enough to throw a currency translation component into the model, but that doesn't affect the illustration of the difference in the two methods.)

    Both methods, of course, give a final total of 45, as they should: 12.50 + 32.50 = 45; and 11.25 + 33.75 = 45. The second method just loads (no pun intended) the freight costs more heavily onto the second item, in recognition of its higher price.
     
    • Like Like x 1
  8. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    And you would've won this bet.

    Excellent answer! Exactly what I was looking for.

    Now I guess I have to decide which method suits me better.

    Thanks!
     
  9. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Glad it helped, Ebarnichta.

    Either method would be simple to employ, but the potential fly in the ointment with the other guy's formula is that it assumes that the freight (and other post-FOB costs) are a function of the toys' FOB prices. I can imagine that something like shipping insurance---if that's one of your costs---would indeed be proportionate to the items' relative values. But shipping, transport, storage costs, etc., are more likely based on weight or volume.

    For example I could import a $500 watch for much lower shipping cost than the freight I'd pay on a big $75 wooden rocking chair. But if I had these two items bundled into the same shipment, your friend's method would allocate 87% of the post-FOB costs to the watch.

    So if the size and weight of the toys tends to be somewhat proportionate to their prices, a better argument can be made for your friend's method. But if their prices---high to low---have a larger spread than their weights*, I might opt to use your even-allocation method.

    *(For example, you buy items whose FOB prices run from $5 to $10---as in your simplified example---whereas their sizes and weights are somewhat similar.)

    (At this point, ArcSine is about to go off on another tangent; but he pauses, recalling Dorfy's advice not to overthink this issue.) ;)

    Either way, best of success with the business!
     
  10. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    Would you happen to have a source that explains different costing methods and when to apply each one?

    For my cost analysis I actually used a price-weighted method I kind of figured out on my own. If I remember correcylu (don't have the numbers right in front of me), I calculated the percentage of each item toward the Total FOB Cost, then multiplied the percentage of each item with total expenses and went on from there to find thr cost of each item.

    Maybe I'll even look into a volume weighted cost analysis like you said, cause some items are much bulkier than others.
     
  11. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    No, sorry, no literature that I have on file that addresses this kind of matter. I'm like you; I just custom-build a model or method to suit the situation at hand, as the need arises.

    One thought, though; this topic falls primarily under the province of Cost Accounting. You could Google around to see if there exist some sites devoted to the Cost Accounting field. Or, you could pick up a used CA text on (say) Amazon for a couple of bucks + shipping (such as here. $1.32 for a used text ain't bad.)

    But I'd probably opt to just go with your instincts on this one. Whatever method of allocating the post-FOB costs to the individual items, that makes the most sense given your insider's perspective of the specific details, is likely the best method.
     
  12. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    Ok. I've probably taken too much of your time already. Thanks again.
     
  13. Dorfy

    Dorfy
    uix_expand uix_collapse
    Member

    Joined:
    Aug 11, 2011
    Messages:
    88
    Likes Received:
    22
    As shipping containers come in standard sizes, the percentage argument is relatively invalid, because cost of shipping is based on volume, with weight being a secondary, space is consideration, space is more of a problem on container ships rather than weight.
     
    • Like Like x 1
  14. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Not at all, amigo; always happy to chip in with my 2 cents (especially if I think I might be making an indirect contribution to the GDP growth of the economy from whence come some of my favorite cigars :)).

    I have to sign off the air for a while, but I do think that whatever allocation method you devise will be as good or better than some off-the-shelf rule-of-thumb model you might find somewhere on the 'net. That volume-weighted approach you mentioned, for example, sounds good. Set up some volume and weight data in an Excel sheet for the items you buy, get the appropriate formulas in place, and let the spreadsheet do the allocation calcs for you, for each purchase. Just a thought.

    Best of luck!
     
  15. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    An excellent point. If the sizes of the different types of toys don't vary a lot, this would argue for the simple spread of the costs across the total number of units.
     
  16. ebarnichta

    ebarnichta
    uix_expand uix_collapse
    New Member

    Joined:
    Oct 17, 2011
    Messages:
    8
    Likes Received:
    0
    Yes, I will definitely look at the volume based weighted analysis tomorrow as the volume of the toys does vary a bit. Somecan be very thin while others boxy, hence bulkier. I do have the CBM numbers for each item so could definitely whip something up.
     
  17. Dorfy

    Dorfy
    uix_expand uix_collapse
    Member

    Joined:
    Aug 11, 2011
    Messages:
    88
    Likes Received:
    22
    I actually googled this, and found a company that will give you an online quote, the first parameter was "Container size" you were given a choice, the second parameter was weight, I couldn't delve mush deeper because the questions became business oriented, despite this it's good to know that at least one company has an online resource for business to get inter-continental transport costs.
     

Share This Page