This option enables the concept of landed cost in your database.
The main reason you would want to do this is to allow you to track costs in addition to the direct purchased cost of material through inventory rather than using a burden.
For example say I buy a qty of 3 of PART ID ABC for $1000 each = 3 x $1000 = $3000 USD.
Now I have to pay for FEDEX to deliver the parts from the supplier in Texas to our plant….courier cost $200 USD
Now I have to pay for customs broker to clear the part across the border….customs broker cost $50 CAD
If you leave this option box unchecked
You can only voucher AP against the original purchased material receipt. You voucher the receiver for $3000 USD. Of course this values the inventory at the USD amount converted to CAD…let’s say that is $2700 CAD (or 900 per each unit)
The freight cost and the brokerage cost are then charged to an overhead expense account or possibly directly to the project or work order if the materials are bought to a job. In our case the materials are bought to inventory but we really want to track the full cost of getting the parts to the plant as our inventory. The only way we could do this is to apply a general burden rate. Since we want to track the actual cost of those parts being purchased this just isn’t good enough.
So we check the box
Now when the parts are received for the part we do a normal PO receipt, receive the invoice from the supplier and voucher the PO receipt just as we normally do.
When the invoice comes from FEDEX, we charge the $200 to the PO Receiver ID associated with the receipt of the goods. Now the inventory value of the part will increase to $3200 USD (or 1,066.67 each USD). Of course there may be different exchange rates applied to these two invoices depending on timing of the transactions but I won’t complicate this further.
When the invoice for the customs broker comes in we can again charge the original material PO Receiver ID with additional costs and the inventory value of the parts will increase again.
As each of these changes occur, in an actual cost database, the FIFO layers are updated and the costs are traced through any subsequent inventory transactions.
So what is the downside?
Costing can be more complex to reconcile.
You must determine a reasonable way to apportion the cost of these additional charges to the various parts being received so this can increase the complexity of AP invoice entry.
You must be able to determine the original PO receipt ID that relates to the additional landed cost charges
in some way and setup a system to manage this.
Some additional complexity can be expected for any kind return or credit.
More accurate actual cost tracking. This can be especially helpful in a project or defense contractor or cost plus pricing scenario.