Landed cost is the full cost of getting an item into your stock: supplier price plus freight, duty, brokerage, insurance and handling. Under FIFO, each receipt creates a cost layer, and ancillary charges are apportioned across the items in that shipment — usually by value, weight or volume — so the layer carries the true cost that will later flow to cost of goods sold.
A part that appears on a supplier invoice at $12.40 does not cost $12.40. It cost $12.40 plus its share of an ocean container, plus duty at whatever rate its tariff code attracts, plus brokerage, plus the fee the freight forwarder added for a document amendment. If you value that part at $12.40, every margin figure downstream of it is wrong — and wrong in the direction that flatters you.
What counts as landed cost
Landed cost is the total cost of bringing an item to the point where it is available to use or sell. The general test is whether the cost was necessary to get the item to its present location and condition.
| Usually capitalised into inventory | Usually expensed |
|---|---|
| Supplier price, net of trade discounts | Outbound freight to the customer |
| Inbound freight and fuel surcharges | Storage of finished goods awaiting sale |
| Customs duty and import tariffs | Abnormal costs — demurrage from your own error, expedite fees for a missed deadline |
| Customs brokerage and clearance fees | General purchasing department overhead |
| Marine or transit insurance | Recoverable taxes such as VAT or GST input credits |
| Port, handling and unloading charges | Financing costs, subject to applicable capitalisation rules |
Under IAS 2 Inventories, inventory cost includes purchase and conversion costs, plus costs of bringing inventory to its present location and condition. Confirm the framework and treatment that apply to your business, including recoverable taxes, abnormal costs and any relevant exceptions.
How FIFO layers work
Under FIFO, inventory is not a single blended value. Each receipt creates a distinct cost layer holding a quantity and the cost that quantity was received at. When stock is consumed, the oldest layer is relieved first.
This is why landed cost has to enter at the layer, not as a periodic adjustment. A layer costed at supplier price and corrected later at the account level gets the balance sheet approximately right while leaving every individual job's cost of goods sold wrong. The whole point of FIFO layering is that a job carries the cost of the specific stock it consumed.
Two things are worth stating plainly because they are so often confused. FIFO is a cost flow assumption, not a picking instruction — it decides which layer's cost is relieved, not which physical box the picker takes. And a layer's cost is fixed once consumed: if a freight invoice turns up after that stock has shipped, the difference cannot be added to inventory, because that inventory no longer exists.
Choosing an apportionment basis
A shipment carries one freight charge and many items, so the charge has to be split. The basis should reflect what actually drove the cost.
| Basis | Best for | Fails when |
|---|---|---|
| Value | Duty, insurance, brokerage — charges genuinely driven by declared value | Mixed shipments of dense cheap goods and light expensive goods |
| Weight | Road and air freight, most surcharges | Bulky low-density items that fill a container without weighing much |
| Volume | Ocean and LCL freight priced by cubic metre | Dense items where weight, not space, is the binding constraint |
| Quantity | Per-unit handling, inspection or labelling fees | Items of wildly different size within one shipment |
Duty deserves particular care because it is genuinely per-item: different tariff codes attract different rates, so apportioning a single duty total across a mixed shipment by value will misstate every line. Where duty varies by code, it should be applied at the line level from the customs entry rather than spread.
A worked example
One shipment contains 8,000 hinges costing $9,600 and 120 panel sets costing $38,400. Assume a $5,760 freight charge can reasonably be compared using value or weight. Duty and taxes are excluded from this example because their allocation may follow different rules.
| Item | Weight | Supplier cost | Freight by value | Freight by weight |
|---|---|---|---|---|
| Cabinet hinges | 2,400 kg | $9,600 | $1,152 | $3,456 |
| Panel sets | 1,600 kg | $38,400 | $4,608 | $2,304 |
| Total | 4,000 kg | $48,000 | $5,760 | $5,760 |
The hinges are 20% of supplier value but 60% of shipment weight. A weight allocation therefore assigns them 60% of the freight: $3,456.
| Item | Supplier unit cost | Landed by value | Landed by weight |
|---|---|---|---|
| Cabinet hinge | $1.200 | $1.344 | $1.632 |
| Panel set | $320.00 | $358.40 | $339.20 |
The total shipment cost is unchanged at $53,760. What changes is its distribution. Select the basis that reflects the freight agreement and shipment characteristics; use volume or a direct allocation when that better reflects the charge.
When the freight bill arrives late
Goods almost always arrive before the charges that brought them. The forwarder invoices two weeks later, the customs entry is finalised later still, and by then some of the stock has been consumed. Three situations follow.
- All stock still on hand. Straightforward. Revalue the layer, add the charge, and inventory value rises by exactly the invoiced amount.
- Some stock consumed. Split the charge. The portion relating to stock still held goes into the layer; the portion relating to stock already sold or issued needs to follow its destination, such as WIP, finished goods or recognised expense. It should not all be loaded onto the units still in the original layer.
- All stock consumed. The whole charge is a cost adjustment. The job or period that consumed the stock ideally absorbs it, which is only possible if the system still knows which jobs took which layers.
The way to keep the second case small is to accrue an estimate at receipt. Book expected freight and duty into the layer when the goods land, then true it up against the real invoice. The estimate will be wrong; it will be far less wrong than zero, and the true-up is a small correction rather than a large one.
How Datum handles it
Datum maintains receipt-linked inventory cost layers and records the source layers consumed by supported stock and build workflows. That provides a connection between a receipt's cost and the later use of its material.
Bill-related cost amendments include a preview of remaining and consumed quantities, validation of allocations, and purchase-price-variance handling. Review the applicable amendment rather than assuming a late invoice will silently redistribute itself across every job.
Your accounting setup determines where the financial records are maintained. An external connection should be assessed by its supported records and directions, not by assuming that every inventory movement creates an exported journal.
What to check in your setup
- Agree which charges belong in inventory cost under your accounting policy.
- Check the allocation bases available for each supported workflow; do not assume value, weight and volume are interchangeable settings.
- Test a late bill with both remaining and consumed stock, including the review and posting steps.
Related questions
Should freight be expensed or capitalised into inventory?
Inbound freight on goods for resale or production is generally capitalised into inventory cost, because it is a cost of bringing the item to its present location and condition. Outbound freight to a customer is a selling expense. Treatment varies by jurisdiction and framework, so confirm the policy with your accountant.
How should freight be apportioned across mixed shipments?
By whichever driver best reflects what caused the cost. Value-based apportionment is simplest and works when items are broadly similar. Weight or volume is fairer when a shipment mixes dense, cheap items with light, expensive ones — allocating ocean freight by value would otherwise load almost all of it onto the expensive parts.
What happens when the freight invoice arrives after the goods?
Review the difference against the receipt and the stock it supplied. The portion still held and the portion already issued or sold may require different treatment. Confirm the supported adjustment workflow and destination of consumed stock before posting the amendment.
Does FIFO mean physically shipping the oldest stock first?
No. FIFO is a cost flow assumption, not a picking rule. It determines which cost layer is relieved when stock is consumed. Physical rotation matters for shelf life and obsolescence, but the two are independent decisions.