Saturday, June 1, 2019

Standard Cost Item used for Drop Ship Transaction does not respect Standard Cost

Drop Ship Item recognizes Cost of Sales amount equivalent to Item Rate as paid via Billings, regardless of the Item's Unit Standard Cost. The rationale for this is that the Item didn't go through the normal flow of Inventory Management since it is the Vendor who delivered the Item straight to the Customer and not coming from the company's warehouse.

Since a Drop Ship Item does not recognize cost of goods sold, there should be no variances to be recorded. Hence, the cost to be recognized is the Cost of Sale or Selling Cost which measures profitability by deducting the recognized Cost of Selling the item from the recognized Revenue.

The recognized cost should be equivalent to the amount paid/expense to the vendor, thus, this way of accounting for drop ship (with Costing Method = Standard) is in line with GAAP ruling. Hence, the effect on the financials are correct.

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