Question: What are drop-ship commission orders?
Answer: A drop-ship commission order is a transaction used when your company brokers an order from a supplier to a customer.
Question: How is a drop-ship commission order different from a standard drop-ship order?
Answer: A drop-ship commission order is different, as follows:
The customer receives an invoice for the products directly from the supplier.
You do not create accounts payable vouchers for the order.
You send an invoice to the supplier for the commission you are owed for brokering the transaction.
Question: What setup is required for drop-ship commission orders?
Answer: Before you can process drop-ship commission orders, perform the following setup:
In Order Class Maintenance, create an order class for drop-ship commission orders. You must select the Used for Drop Ship Commission Orders check box for the order class. If you need to generate a purchase order and track shipping for drop-ship commission orders, also select the Require Drop Ship PO check box for the order class.
In Customer Maintenance, create billing customers for the suppliers for which you will be brokering transactions so that you can bill the supplier for your commission amounts.
In Order Entry Additional Charge Maintenance, create additional charges for the drop-ship commission orders. If the additional charge will be used to calculate commission amounts based on costs, select the Used for Drop Ship Cost Based Commissions check box. If the additional charge will be used to update sales history, select the Update 'Cost' Sales History Component check box. For more information on these options, see the detailed examples below.
In Order Entry Automatic Additional Charge Maintenance, set up automatic additional charges if commissions are based on a predetermined amount or rate. The automatic additional charge should be defined as a per amount negative additional charge that is $-1 per $1.
Question: How do I process drop-ship commission orders?
Answer: In the most basic process, an order is entered when you receive the details of the brokered transaction between the supplier and the customer. Users will enter a drop-ship commission order by selecting the customer in Order Entry, selecting a drop-ship commission order class, and then entering the supplier as the billing customer. The customer is entered on the order so that the sales history is properly updated.
After the products are shipped from the supplier, you can process the order so that the supplier can be billed the commission amount. The order is processed by clicking the Process Commission Order button in the ribbon in Order Entry. When the Process Commission Order button is clicked, a pick demand is created and confirmed. This pick demand does not update inventory. The pick demand is similar to a drop-ship order pick demand. It only is created for internal processing purposes. It is not printed and used for picking.
Note Some customers or suppliers may require paperwork to facilitate the drop-ship commission transactions, and you may also want the ability to track shipment and container data for these transactions. If this is the case, you should select the Require Drop Ship PO check box for the drop-ship commission order class in Order Class Maintenance. If this check box is selected, users will not use the Process Commission Order button in the ribbon in Order Entry, but will instead generate a drop-ship purchase order in Drop Ship and Special Order Create, and then use the standard drop-ship confirmation process to complete the internal pick demand and invoicing process. The drop-ship purchase order is closed automatically and is not used for the accounts payable voucher reconciliation process. The purchase order is only created to facilitate paperwork and improve visibility.
There are two methods you can use for calculating commission amounts:
Method #1 - Commission Based on Cost: You are paid a commission by the supplier and that commission is calculated based on the price the customer pays minus the cost the supplier would normally charge for the products. If you use this method, you will select the Used for Drop Ship Cost Based Commissions check box for an additional charge in Order Entry Additional Charge Maintenance.
Method #2 - Commission Based on a Predetermined Amount or Rate: You are paid a commission that is not calculated based on the cost matrix cost of the product sold to the customer. Instead you are paid a commission based on a negotiated amount or rate.
In both methods, the price on the sales order is generally your price based on a price matrix.
In method #1, a commission cost charge type is entered at the line-item level and a commission unit cost is calculated based on the cost matrix data in the system (again, at the line-item level). These two pieces of information are used for invoicing process. The commission unit cost is multiplied by the quantity and a negative additional charge is applied during the pick demand confirmation process. The charge is not actually seen or added during order entry. The net effect of the price and the negative charge that represents the cost of the product is the margin, which is the commission amount the supplier owes your company.
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Example An order is brokered, as follows: Price = $100 Cost = $75 Units = 10 Line item = $100 x 10 = $1000 Additional charge = $75 x 10 x -1 = -$750 The invoice is generated for $250 ($1000 - $750) |
In method #2, the commission is not necessarily based on the cost. It is simply a fixed amount negotiated between your company and the supplier at some point before the transaction is processed through the system. This approach may require some additional setup.
An automatic additional charge must be set up that will zero out the dollar amount on the order. The automatic additional charge should be defined as a per amount negative additional charge that is $-1 per $1.
A second line item additional charge can be added that reflects the commission amount.
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Example An order is brokered, as follows: Commission amount = $150 Price = $100 Units = 10 Line item = $100 x 10 = $1000 Automatic additional charge -$1 per $1 = -$1000 Commission Additional Charge = $150 The resulting invoice is for $150. The order will also contain the additional charges, unlike when using the commission cost method above. |
In addition to the two methods for calculating commission amounts, there are also two methods for updating sales history and the general ledger:
Method A - Sales History Based on Sales Amount: In this method, the full amount of each order is reflected in sales history and the general ledger. If a brokered order is for $1000, it is recorded as a $1000 sale. However, to record a sale with no corresponding cost would be inaccurate because you are not getting paid the full amount of the sale. You are only invoicing the commission amount. The commission amount is all profit; there is no cost of goods. So, to properly calculate the profit in the sales history, you need to record the difference between the sales amount and the commission amount as a cost. This cost is visible in the sales history, but it does not post to the cost of goods sold account.
Method B - Sales History Based on Commission Amount: In this method, only the commission amount is reflected in sales history and the general ledger. If a $1000 brokered order has a commission amount of $250, it is recorded as a $250 sale.
The method used depends on whether the Update 'Cost' Sales History Component check box is selected or cleared in Order Entry Additional Charge Maintenance. If the check box is selected, method A is used. If it is cleared, method B is used.
The following process occurs:
A drop-ship commission order is entered with one line item of 10 units at a unit price of $100 and a unit cost of $75. A commission cost charge type is selected for the line item in O/E Line Item Entry. The system calculates the commission unit cost based on a cost matrix. This can be manually overridden.
During the pick confirm process a negative additional charge is added to the pick demand for -$750 (10 x 75).
During the invoice creation process the invoice is created with a net invoice amount of $250.
Sales history is updated with $1000 in sales and a cost of $750.
During posting there is one journal entry as follows:
Credit to the sales account for $1000
Debit to the commission additional charge account for $750
Debit to the accounts receivable account for $250
The sales in the general ledger and the sales posted to the sales history match.
The following process occurs:
A drop-ship commission order is entered with one line item of 10 units at a unit price of $100 and a fixed commission amount of $250. An automatic additional charge is used to negate the price of the product. This would generally be a line item automatic additional charge. This charge must be set to not update sales history and should be set to not post with items (a separate sales offset account should be used). The commission charge should be marked as a charge that is used in drop-ship commissions and the Update 'Cost' Sales History Component check box should be selected for it. The commission charge is added as a line item additional charge for $250. The charge type and cost are not entered in O/E Line Item Entry. The net amount of the order is $250.
Sales history is updated with $1000 in sales and the difference between the sales and the commission charge amount (1000-250 = 750) is reflected in the cost. There can be multiple commission charges on the line. The sales history is $1000 because the charge used to negate the price is not set to update sales history.
During posting there is a single journal entry as follows:
Credit to the sales account for $1000
Debit to the sales offset account for $1000 (the account associated with the charge used to negate the price on the order).
Debit to the accounts receivable account for $250
Credit to the commission charge account for $250
The following process occurs:
A drop-ship commission order is entered with one line item of 10 units at a unit price of $100 and a unit cost of $75. A commission cost charge type is selected for the line item in O/E Line Item Entry. The system calculates the commission unit cost based on a cost matrix. This can be manually overridden.
During the pick confirm process a negative additional charge is added to the pick demand for -$750 (10 x 75).
During the invoice creation process the invoice is created with a net invoice amount of $250.
Sales history is updated with the net effect of the sales and commission additional charge of $250 (1000 - 750). There is no cost included. The cost is zero, and the margin percent is 100%.
During posting, there is a single journal entry as follows:
Credit to the sales account for $250 (1000 - 750 charge which is set to post with items)
Debit to the accounts receivable account for $250
The following process occurs:
A drop-ship commission order is entered with one line item of 10 units at a unit price of $100 and a fixed commission amount of $250. An automatic additional charge is used to negate the price of the product. This would generally be a line item automatic additional charge. This charge must be set to not update sales history and should be set to post with items. Another option is to define a set of price matrix records that return a zero price (perhaps based on a special price book). In this scenario, the sales amount of $1000 is not used for either sales history or the general ledger so you can negate the price in any way you want. Special pricing records may be used to accomplish this. The commission charge does not need to be marked as a charge that is used in drop-ship commission orders. If it is marked as being used in drop-ship commission orders, the Update 'Cost' Sales History Component check box must be cleared for it. The commission charge is added as a line item additional charge for $250. The charge type and cost are not entered in O/E Line Item Entry. The net amount of the order is $250.
When an invoice is created sales history is updated with a sales amount of $250 and a cost of zero. The invoice is for $250 and that matches the sales history.
During posting, there is a single journal entry as follows:
Credit to the sales account for $250 if the charge is set to post with items. It is not mandatory that the charge be set to post with items (the Used for Drop Ship Cost Based Commissions check box can be cleared). If the charge is not set up to post with items, then this credit will be to a separate commission account. The sales and charge used to negate the sales will cancel out, unless a zero price matrix structure is used (in which case there will also be no sales impact).
Debit to the accounts receivable account for $250