What is Purchasing Cost? How to Calculate and Allocate Purchasing Costs Effectively

During the operation, businesses often have problems. purchase cost related to the import of raw materials, goods and services. Accurate accounting not only helps businesses control costs but also optimize profits and comply with accounting regulations. 

So What is the cost of goods sold? and how purchase cost accounting How? This article will help you better understand the process and how purchase cost allocation reasonably

1. What is the cost of purchase?

Concept of cost of goods purchased

Purchasing costs are all expenses incurred in the process of purchasing raw materials and goods for the production and business activities of the enterprise. This is an important part of financial management and directly affects the cost of goods sold as well as the enterprise's profits.

Common types of purchasing costs

Purchasing costs include many different items, including:

• Purchase price of goods: Original price of goods and raw materials purchased from suppliers.
• Shipping costs: Shipping and loading costs of goods from the supplier to the company's warehouse.
• Cargo insurance costs: Insurance premium to protect goods from the risk of damage and loss during transportation.
• Warehousing and storage costs: Fee for storing goods in warehouse before distribution or use.
• Import tax, value added tax (VAT): Applicable to imported or domestic goods according to regulations.
• Cost of quality inspection and certification: For some special types of goods, standard certification is required.

2. Characteristics of Purchase Cost

Purchasing costs have several important characteristics that businesses need to keep in mind:

2.1. Linked to the purchasing process

Purchasing costs only arise when a business makes a purchase of raw materials or goods. They may include purchase price, shipping, insurance, taxes, and other related costs. Therefore, managing the purchasing process well will help businesses optimize this expense.

2.2. Subject to change according to market conditions

External factors such as fluctuations in raw material prices, transportation costs, and import tariffs can all affect purchasing costs. For example, when fuel prices increase, transportation costs also increase, causing prices to rise. Therefore, businesses need to monitor market trends to have appropriate purchasing strategies.

2.3. Direct impact on cost of goods sold and profit

Purchasing costs are an important part of the cost of goods sold (COGS). If these costs are too high and not controlled, businesses may have difficulty maintaining competitive prices and profits. Conversely, if purchasing costs are optimized, businesses can increase profit margins without increasing selling prices.

2.4. Need to be accounted for and allocated reasonably

To accurately reflect inventory value and production costs, businesses need to record purchase costs at the right time and allocate them appropriately according to accounting methods. This helps businesses evaluate financial performance more transparently and accurately.

2.5. Impact on business cash flow

Purchasing costs directly affect a business's cash flow. Without a proper purchasing plan, a business may experience cash flow shortages, making it difficult to pay suppliers, employee salaries, or other operating expenses. Controlling and optimizing purchasing costs helps maintain a stable cash flow.

3. What are the costs of purchasing imported and domestic goods?

3.1 Purchase costs for domestic goods

When a business purchases goods from domestic suppliers, costs may include:

• Contractual purchase price of goods.
• Domestic shipping costs from supplier to warehouse.
• VAT (deductible depending on the case).
• Cost of loading, unloading, storage and preservation.
• Other expenses such as inspection and quality control fees, if any.

3.2 Cost of purchasing imported goods

Imported goods have some additional special costs such as:

• FOB (Free on Board) price: Price of goods at the export port excluding international shipping costs.
• International shipping costs: Shipping fees from abroad to Vietnam.
• Import tax: Depends on the type of goods and trade agreement.
• Cargo insurance: Insurance of goods during transportation.
• Port storage fees, customs fees: Cost of storing goods at the port, customs clearance fees.
• Quality inspection and certification costs: Imported goods must comply with Vietnamese standards.

4. How to account for purchase costs

4.1 Accounting for inventory purchase costs

When a business purchases goods for storage and receives an invoice but has not yet paid, the accountant records as follows:

Debit accounts:

• TK 156: Goods (if they are business goods);
• Account 152: Raw materials (if they are raw materials for production or processing);
• Account 133: Input VAT (if any VAT is deductible).

Have an account:

• Account 331: Payable to seller.

When paying suppliers:

Account Debit:

• Account 331: Payable to seller.

There are accounts:

• Account 111: Cash;
• Account 112: Bank deposit.

4.2. Accounting for transportation and unloading costs

Transportation and handling costs may be included in the cost of purchased goods or recorded separately, depending on the accounting policy of the enterprise:

a) If shipping costs are added to the purchase price:

Debit accounts:

• TK 156: Goods;
• Account 152: Raw materials;
• Account 133: Input VAT (if any).

There are accounts:

• Account 331: Payable to seller;
• Account 111, 112: Cash, bank deposit (depending on payment method).

b) If transportation costs are recorded separately in cost of sales:

Debit accounts:

• Account 641: Selling expenses;
• Account 133: Input VAT (if any).

There are accounts:

• Account 331: Payable to seller;
• Account 111, 112: Cash, bank deposits.

4.3. Accounting for costs of purchasing goods not in stock

In case a business purchases goods or raw materials but does not store them in the warehouse (for immediate use in production or management), the accountant records:

1. a) If the goods serve production:

Debit accounts:

• Account 621: Direct material costs;
• Account 133: Input VAT (if any).

There are accounts:

• Account 331: Payable to seller;
• Account 111, 112: Cash, bank deposits.

1. b) If the goods serve business management:

Debit accounts:

• Account 642: Business management expenses;
• Account 133: Input VAT (if any).

There are accounts:

• Account 331: Payable to seller;
• Account 111, 112: Cash, bank deposits.

5. How to allocate purchasing costs

Job purchase cost allocation A reasonable way to help businesses control the cost of goods sold, optimize costs and ensure accurate financial reporting. Below are two common methods that accountants and business owners can apply.

5.1 Allocation based on purchase price criteria

This method allocates the cost of purchases based on the total value of goods in stock. How to do it:

• Determine the total purchase cost, including original price of goods, shipping costs, insurance, import duties, etc. 
• Calculate cost allocation ratio according to the formula:

Cost allocated to each item = (Import value of that item / Total import value) × Total purchase cost

 

• Applicable to businesses that import or purchase high value goods with large price differences between items.

5.2 Allocation based on quantity of goods in stock

This method is based on the quantity of imported goods to allocate purchasing costs, suitable for businesses with many types of goods of equivalent value.

• Determine the total cost of purchases to be allocated. 
• Calculate the cost allocated to each product according to the formula:

Cost allocated to each item = (Quantity of that item imported / Total quantity imported) × Total purchase cost

• Suitable for consumer goods, raw materials or items with uniform value.

6. Allocate purchasing costs more easily with Bizzi Expense expense management software

 

Manage purchase cost more effective with Bizzi Expense – Automation software helps businesses track, approve and optimize budgets quickly. Reduce errors, save time and control expenses easily with just a few steps. Here are some benefits when businesses apply Bizzi Expense expense management software:

6.1. Automate the purchasing cost accounting process

Bizzi Expense allows automatic data extraction from electronic invoices and receipts, helping businesses collect complete expense information quickly and accurately. The system is capable of synthesizing data from many different sources, including email, mobile applications and accounting software, making cost management and control more effective.

6.2. Easy and accurate allocation of purchase costs

The software allows setting up budgets for each category by department or project, allocating reasonable budgets by fiscal year. Business owners can track the remaining budget, used costs and use the filter feature for indicators within a specific period of time when needed for evaluation.

6.3. Budget control and regulatory compliance

Bizzi Expense helps businesses control their budgets well according to spending regulations, the system automatically warns when spending exceeds, ensures compliance with regulations on accounting, financial reporting and taxes accurately, minimizes the risk of fines due to violations and enhances the reputation of businesses with management agencies.

6.4. Minimize errors and fraud in spending

Automating the cost management process helps reduce errors and fraud in spending. The software helps to strictly control expenses, ensuring transparency and accuracy in the process of accounting for purchasing costs.

6.5. Increase efficiency and save time

With Bizzi Expense, creating, managing expenses, making payment requests and approving them remotely becomes simple and easy with just a few clicks. This saves time and increases efficiency for employees and accounting departments.

Experience Bizzi Expense today: https://bizzi.vn/dang-ky-dung-thu/ 

Don't let expense management become a burden for your business. Let Bizzi Expense accompany you on your journey to financial optimization and sustainable development.

7. Notes on Purchase Costs

Accurately account for purchasing costs

• Ensure that all purchase expenses are fully recorded in the accounting books in accordance with accounting standards.
• Determine what type of purchasing cost it is: raw material cost, inventory cost, or related service cost.
• Compare invoices and documents with orders to avoid accounting errors.

Reasonable allocation of purchasing costs

• Determine the method purchase cost allocation appropriate, such as by quantity, weight or order value.
• Allocate shipping, storage, and handling costs to cost of goods sold to calculate accurate profits.
• Use automated accounting software to minimize errors and save time in the cost allocation process.

Control costs incurred when purchasing

• Compare prices from multiple suppliers to choose the one with the best price.
• Negotiate discount policies and incentives when purchasing in bulk or placing regular orders.
• Control additional costs such as shipping fees and import taxes to avoid unnecessary costs.

Store and compare valid documents

• Ensure complete invoices, contracts, and delivery notes to avoid tax and accounting risks.
• Periodically compare purchase documents with accounting books to detect discrepancies.
• Cost management software application helps digitize documents, minimize loss and optimize accounting processes.

Evaluate the effectiveness of purchasing costs

• Proportion analysis purchase cost on total costs to evaluate performance.
• Adjust purchasing strategy according to market price fluctuations to optimize costs.
• Combine purchasing data with financial analytics to improve business profitability.

8. Frequently Asked Questions

Question 1: Conditions for recording reasonable purchase costs?

The cost of a purchase is considered reasonable if it meets the following conditions:

• Actual occurrence and with full valid documents (invoices, contracts, delivery and receipt minutes).
• Directly related to the production and business activities of the enterprise.
• Recorded on time and in accordance with accounting and tax regulations.

Question 2: What is the criterion for allocating purchasing costs?

Allocation of purchasing costs is the process of dividing and recording costs into appropriate categories of goods or departments. Some common criteria include:

• By quantity of goods in stock: Divide costs by actual quantity of each shipment.
• By value of goods: Allocation according to the ratio of import value to total value of shipment.
• By weight or volume: Applicable to goods whose size and weight characteristics affect shipping costs.

Question 3: How to reduce purchasing costs in business?

Businesses can optimize purchasing costs in the following ways:

• Negotiate with suppliers: Look for the most competitive prices and good discount policies.
• Buy in bulk: Helps reduce unit prices through economies of scale.
• Optimize purchasing process: Use process automation management software to avoid errors and unnecessary costs.
• Take advantage of promotions and discounts: Keep track of promotions and support policies from suppliers.

Question 4: What are the most common purchasing costs?

Purchase costs may include:

• Price of goods and materials.
• Cost of transportation and unloading of goods.
• Cost of storage and preservation of goods.
• Customs fees, import taxes (if any).
• Cost of insurance of goods during transportation.

Question 5: Does the cost of purchasing affect the selling price of the product?

Yes. Purchasing costs directly affect the cost of goods sold (COGS) and thus the selling price of the product. If the business does not optimize costs, the selling price may be higher than competitors, reducing competitiveness in the market.

Question 6: How can purchasing costs be reduced?

• Compare multiple providers to get the best price.
• Strengthen control of import process to avoid loss and damage.
• Use automated financial management software to track and optimize costs.
• Utilize domestic supplies if the quality is comparable, helping to reduce shipping costs and import taxes.

Conclude

Management purchase cost effectively not only helps businesses control finances better but also optimize profits and improve competitiveness. Accounting for purchase costs correct and Reasonable cost allocation will help businesses maintain stable cash flow, comply with accounting and tax regulations and make accurate financial decisions.

To simplify the cost management process, businesses can apply technology to the accounting process. Software Bizzi Expense helps automate the tracking, allocation and control of costs, thereby minimizing errors and saving time for accountants. Experience it now to improve financial performance and optimize purchasing costs more intelligently!