Mastering Landed Cost: Key to Accurate Gross Margin

The Margin is in the Details

When we talk about gross margin, we often think of pricing strategies, input costs, and manufacturing efficiency. Rarely do we open the conversation with freight-in charges, customs duties, or warehousing fees. Yet these so-called “below-the-radar” costs are anything but marginal. For companies importing goods, assembling products across geographies, or managing third-party logistics providers, the failure to properly account for all landed costs is the equivalent of leaving cash on the tarmac.

I have seen this firsthand — product firms misclassifying freight charges as SG&A, overstating gross margins, and inadvertently misleading stakeholders about true unit economics. The lesson is clear: when it comes to landed cost accounting, precision is not just advisable. It is fiduciary.

Defining Landed Cost: More Than Freight

Landed cost refers to the total cost of getting inventory from the supplier’s facility to your books — and it includes far more than just shipping. Under ASC 330, inventory must include all costs necessary to bring the goods to their current location and condition. This includes:

• Freight-in (ocean, air, ground)
• Customs duties and tariffs
• Insurance during transit
• Handling and port fees
• Warehousing at arrival
• Brokerage and clearance charges

Yet many ERP systems, and even more finance teams, fail to integrate these costs accurately into the cost of goods sold (COGS). Instead, they get parked in “freight expense” or “miscellaneous logistics” accounts in SG&A. The result is not just a misclassified line item — it is a gross margin distortion.

Cost Layering and ASC 330 Implications

From an accounting standpoint, ASC 330 requires that inventory be measured using a consistent cost basis. This means freight-in and related costs must be capitalized — not expensed — when directly attributable to bringing inventory to condition for sale.

In practice, this demands the use of cost layering techniques. Whether you use FIFO, LIFO, or weighted average, each inbound shipment should reflect its fully burdened cost. If your ERP does not allocate freight costs per SKU or PO, you are operating with a blind spot.

Let us take an example: if a shipment of components worth $100,000 incurs $20,000 in freight and customs, the landed cost is $120,000. If only the $100,000 gets capitalized and the $20,000 sits in SG&A, your COGS per unit will be understated by 20 percent — and your gross margin overstated by the same. Multiply this over quarters and across product lines, and you have a margin narrative that is numerically precise but economically false.

When Warehousing Becomes Capitalizable

Warehousing is another grey area. Not all warehousing costs are capitalizable. Under GAAP, only those directly attributable to staging, preparing, or storing goods prior to sale qualify. Ongoing distribution center rent, picking labor, or general inventory storage are typically expensed as incurred.

However, transitional warehousing — where goods are staged between customs clearance and internal transport, or where inventory requires reconditioning — may meet the capitalization criteria. This is particularly relevant in international sourcing models where product consolidation and kitting occur post-import.

Systems Integration: The Hidden Constraint

One of the most persistent challenges I have seen across companies, from Series A to D, is the disconnect between operational logistics and financial systems. Freight-in charges are often buried in a UPS or Flexport invoice, unlinked from the original PO. Customs brokerage is paid in lump sum, applied to multiple shipments, and unallocated across SKUs.

Finance ends up coding costs manually, relying on allocation assumptions or worst-case, simply writing off the charges to a generic account. Without systematic mapping of inbound costs to inventory receipts, the burdened cost per unit is never fully known — which makes pricing, budgeting, and cost reduction efforts fundamentally speculative.

This is not a problem of data availability. It is a problem of system design and process rigor.

Strategic Implications for Product Companies

Proper landed cost accounting is not merely a GAAP requirement. It is a strategic lever. Consider the following:

• Pricing Strategy: If your pricing decisions are based on unit cost assumptions that exclude freight, your margins may be illusory.
• Vendor Negotiations: Understanding landed cost per supplier lane allows you to renegotiate on more than unit price — you can attack the cost stack end-to-end.
• Tax Optimization: Under certain jurisdictions, over- or under-stating inventory costs can affect VAT recoverability or intercompany transfer pricing exposure.
• Working Capital: Misclassified landed costs may distort inventory valuation and affect borrowing base calculations in ABL facilities.

A Case From the Field

I worked with a Series C consumer electronics firm that had built its cost model around ex-factory pricing from Asia. After a freight shock and U.S. tariff adjustment, their real landed cost per unit jumped 17 percent. But because their ERP failed to update cost layering, the cost delta went unnoticed in financial reporting.

When the board questioned the discrepancy between margin forecast and actuals, the company had no defensible explanation. We rebuilt their landed cost engine, integrating freight quotes, customs data, and PO matching logic. Within two quarters, the pricing strategy was realigned, SKU-level profitability became transparent, and vendor discussions shifted from “how much per unit” to “how do we optimize the full delivery chain.”

Actionable Steps for Finance Leaders

1. Audit your chart of accounts. Ensure that freight-in, duties, and customs costs are routed to inventory, not buried in SG&A.
2. Integrate landed cost tracking in your ERP. If your system lacks this functionality, build manual processes for high-volume SKUs or key suppliers.
3. Work cross-functionally. Engage logistics, procurement, and AP to establish clear cost attribution at the shipment level.
4. Conduct quarterly landed cost variance reviews. Compare actual landed costs to standards. Use this to refine pricing and forecasting assumptions.
5. Reexamine reserve and obsolescence policies. Landed cost increases may make certain SKUs less profitable or even non-viable.

Conclusion: Accounting as Strategic Truth-Telling

If gross margin is the lifeblood of a product company, then landed cost is its circulatory map. It tells you where value is created, where it is consumed, and where it leaks unnoticed. Accounting for these costs accurately is not just a matter of compliance. It is a form of strategic truth-telling.

Finance executives must lead the charge in illuminating these hidden costs — not as auditors, but as partners in operational clarity.

Call to Action

If you operate in a business with significant inbound logistics, review your landed cost accounting this month. Assess whether your COGS truly reflect the full cost burden, and whether systems are in place to surface deviations. The accuracy of your gross margin depends on it. So does your credibility in the boardroom.