The Attivo Blog

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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.

Standard Costing has long been used in manufacturing and some distribution environments as a control for measuring variations from expected results.  Everyone has expected results of some kind...purchase price of materials, amount of labor required for assembly, amount it will cost for outside processing, etc.  So shouldn't everyone use Standard Cost?  After having developed and implemented dozens of cost systems for clients over the last 30 years, I've learned that the answer is "it depends"...on two issues.  First, are you a make to stock widget manufacturer, making the same things in the same way over and over, or more of a job shop, make to order type of company?  Secondly, do you have the resources on staff that can manage standard costs in a timely manner, before any transactions happen? Make to stock environments make sense for standards since most things are made over and over again, and are supposed to use the same effort, and have the same input costs.  If they don't, management should know about it promptly to get things back on track.  That's the role of standard cost variance reporting. Make to order businesses rarely produce something in the same manner, since each job differs based on the customer's quote, typically.  In this case, it is important to understand the actual cost of a job once completed (or during the process) as compared to how the job was quoted.  Usually not a lot can be done about the actual cost incurred, but a lot should be learned about improving the quoting process from this comparison of actual cost versus quoted cost. Enterprise software that controls the accounting, inventory, procurement, fulfillment and manufacturing process (referred to ERP systems), provide a choice of cost methods to use.  Mid-market systems such as Macola ES and Microsoft Dynamics GP (Great Plains) not only give you a choice of which inventory valuation method to use, but if you choose standard costing, you also get visibility into weighted average and last cost as well.  Unfortunately, unless you are using a much more expensive software solution, you can't pick and choose costing methods at the item level.  Once chosen, it applies to all inventory for the whole company,