Understanding Landed Cost vs Average Cost

The advantages of using Landed Cost calculations on specific inventory vs. Average Cost calculation

In the world of inventory management, it is crucial to have an accurate understanding of the cost of your products. This knowledge allows you to make informed decisions about pricing, purchasing, and inventory levels. Two common methods of inventory costing are landed cost and average cost calculations. In this article, we will explore the advantages of using landed cost calculations on specific inventory versus average cost calculations.

What are the average and landed costs?

First, let’s define what we mean by product specific landed cost and average cost. Inventory-specific landed costs refers to the total cost of a SKU, including all expenses associated with getting the product from the manufacturer to your warehouse. This includes things like freight, duties, and insurance. Average cost, on the other hand, is simply the total cost of all units to manufacture and ship divided by the number of units. This method is often used when a company has a large volume of products that ship together in a single container, and it is not practical to track the cost of each individual unit.

So why is it important to use landed cost calculations on specific inventory?

There are several reasons:

1. Greater accuracy in pricing:
   When you use landed cost calculations, you have a more accurate understanding of the true cost of a product. This allows you to set prices that accurately reflect the cost of the product, ensuring that you are not selling at a loss.
2. Better purchasing decisions:
   Knowing the landed cost of a product also allows you to make more informed decisions about purchasing. For example, if you know that the landed cost of a product is high, you may choose to purchase from a different supplier or negotiate better terms with your current supplier.
3. Better inventory management:
   With accurate cost information, you can make more informed decisions about how much inventory to keep on hand. For example, if you know that the landed cost of a product is high, you may choose to keep less of it in stock to minimize the risk of carrying excess inventory.

On the other hand, there are some disadvantages to using average cost calculations:

1. Inaccurate pricing:
   When using average cost calculations, prices are determined by dividing the total cost of all units of a product by the number of units. This method can lead to inaccuracies, particularly when the individual units have varying weights and/or sizes. For instance, applying an average cost to a shipment of smaller, lighter products will make them appear more expensive than they actually are. Conversely, applying the average cost to larger, heavier products will make them seem less expensive. In either case, this results in operating with inaccurate data.
2. Limited information for purchasing decisions:
   The average cost of inventory doesn’t offer details about individual unit costs, hampering the ability to make informed purchasing decisions.
3. Limited information for inventory management:
   Average cost calculations do not provide information about the specific cost of individual units, making it more difficult to make informed decisions about inventory levels.

In conclusion, using landed cost calculations on specific inventory is crucial for small to mid-sized importers and global trading companies in order to make informed decisions about pricing, purchasing, and inventory management. However, keeping track of all the expenses associated with getting the product from the manufacturer to your warehouse can be time-consuming and complex.

That’s why Visco Software is the perfect solution for your business.

Visco is a fully integrated ERP software specifically designed for import and export businesses as well as wholesale distributors. It allows all departments to share the same information from one central location, offering a logical next step up from stand-alone QuickBooks and the series of Excel spreadsheets to manage the business. With Visco, you can easily calculate landed costs, forecast inventory needs, and track containers in real-time. Plus, it seamlessly integrates with QuickBooks and offers automated email notifications, mobile app access and more. Don’t miss out on the opportunity to take your business to the next level. Try the demo today and experience the benefits of Visco for yourself.