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Landed Costs, or the "all in" costs of materials and inventory on the shelf, are very important for understanding true cost of product and margins. Essentially, a landed cost is a product cost that is inclusive of not just the cost of the material that is paid to the vendor, but all of the costs incurred in getting it to your shelf. Typical landed costs include inbound ocean freight, duties and fees paid, dreyage or other hauling charges, a harvesting charge for a crop, etc.
Some buyers even include their own internal material handling or receiving inspection charges to get inventory onto the shelf, or into a state where the inventory is ready for sale or use in a manufacturing process. Such costs can be considerable, especially if there are significant freight costs due to weight or ocean freight.
Imported items may have duties that should be associated with them. The alternative to associating these costs with the specific inventory items that generated them is to charge the costs as a period expense, which then applies to all items sold. Not only does this distort margins, it expenses the costs more quickly, which increases cost in the short term. Since this lowers inventory valuation, it lowers profits, and with it income taxes.
The IRS has an opinion about this, which may not be the same as yours! Assigning and managing landed costs can get tricky. Ocean freight cost for a container of mixed items is a good example. You'll need to make some decisions regarding how to allocate the total freight cost...perhaps by weight, cube, value, etc. There are several affordable small business and mid-market systems that help to achieve the goal of receiving inventory in at it fully-loaded expected cost, and accruing for both the actual cost of the inventory, along with all of the other cost elements.
Macola Enterprise Suite, Globe Enterprise and Microsoft Dynamics GP are great choices for managing landed costs. They offer the setup flexibility needed to get this right, which is really important to managing this function properly, and keeping the administrative overhead needed as low as possible.
Contact us today to find out more about managing your landed costs and improving profits.
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