We are thinking of adding a material burden to some of our components due to the tariff situation; I’m not sure if it’s the best idea or if we should look at this some other way.
Currently, we have no material burdens at all on parts. When we purchase a part that has a tariff, the tariff is not typically part of the purchase order and gets posted from the invoice as a header charge that is tied to a COGS GL account. That isn’t reflected in the cost and margin of sales parts though. It seems like we would be overstating our COGS by having a material burden and posting the tariffs as a header charge on the invoice.
This is new territory to me and I’m not sure at all of the best path to take…
When you set a material burden rate and receive parts, that extra landed cost from the material burden is posted as a credit to your Applied Material Burden account set in your company GL controls. This prevents double-dipping the tariff cost by essentially moving the tariff expense from an expense account to inventory (or WIP, for purchase direct materials). The Applied Material Burden cost plus the PO price becomes the total cost of the part received to inventory.
Setting this rate also drives standard Material Burden Cost when you perform a standard cost rollup (if you’re standard costing). Having the Material Burden cost set on your parts adds the material burden (tariff) cost to your WIP and inventory. Eventually when you sell the part, that extra cost will be included in your COGS and margin calculations.
You will want to make sure the header charge being applied on the invoice is pointing to the same account (or an account in the same category on your P&L) as the Applied Material Burden account so they offset.
Thanks! I know we’re playing catch up with all of this stuff but there just aren’t enough hours in the day or enough people here to do all the things to keep up!