When accounting for the purchase of materials for inventory, the cost of those materials in your inventory system will reflect what you paid your supplier for those materials. However, there are a wide variety of other costs that come into play to actually move the goods from the supplier’s facilities to your shelves, including:
- Handling Fees
- Taxes, Tariffs & Duties
- Import Fees
Landed costs allow you to capitalize these expenses and capture the true cost of your inventory. Allocating landed costs gives you more visibility into your true margins, taking into account every penny of the total price paid – not just to the vendor but to transportation companies, taxing authorities, freight forwarders, and others.
From an accounting perspective, the transactions involved in landed costing are simple. Let’s imagine a simple case where you pay a supplier $15,000 for inventory, and a trucking company $500 to deliver the inventory. First, we’ll get an AP invoice from the supplier for the inventory:
Debit AP Accrual $15,000
Credit Accounts Payable $15,000
And we’ll get an AP invoice from the trucking company for the services rendered:
Debit Freight Expense $500
Credit Accounts Payable $500
When the time comes to receive the goods on the AP invoice, once the landed costs are applied the transaction will look something like this:
Debit Inventory $15,500
Credit AP Accrual $15,000
Credit Freight Expense $500
This transaction combines the direct cost of the inventory purchase with the (previously) indirect cost from the trucking company, ensuring the the full cost of your inventory is reflected on the books.
By using landed cost tracking, you can gain more insight into the profitability of customers, products, and product lines, and make informed choices about pricing and sourcing as external variables change and costs fluctuate.