When receiving inventory, you often have additional costs beyond the base product price, such as freight, customs duties, insurance, tariffs, and handling fees. These are called landed costs. To determine the actual cost per item accurately, you need to distribute these extra costs across all items in the shipment.
This article explains two common methods for allocating these costs:
Allocation by Weight
Allocation by Volume
How Allocation Works
Both methods spread extra costs proportionally. Items that are heavier or take up more space will receive a larger portion of the additional costs.
1. Allocation by Weight
How it Works
Costs are distributed based on how heavy each item is compared to the total weight of all items being received. Heavier items get a larger share of the costs.
Example
If your shipment has two items:
Item A weighs 2 lbs, and you received 10 units (total weight = 20 lbs).
Item B weighs 1 lb, and you received 20 units (total weight = 20 lbs).
The total shipment weight = 40 lbs.
If the extra cost (freight, etc.) is $200:
Cost per pound = $200 ÷ 40 lbs = $5 per lb.
Item A (20 lbs): 20 lbs × $5/lb = $100 allocated
Item B (20 lbs): 20 lbs × $5/lb = $100 allocated
Required Data Fields
Product Weight: Must be accurately recorded.
How to Enter Product Weight (Excel):
Just enter a number (assumed ounces): e.g.,
16(16 ounces).Or specify units (
ozorlbs): e.g.,1.5lbsor16oz.
2. Allocation by Volume
How it Works
Costs are distributed based on the space (volume) each item occupies relative to the total volume of all items. Larger, bulkier items will get a bigger share of costs.
Example
If your shipment includes:
Item A measures 10" x 10" x 10" (1000 cubic inches), and you received 5 units (total = 5000 cubic inches).
Item B measures 5" x 5" x 5" (125 cubic inches), and you received 10 units (total = 1250 cubic inches).
Total volume = 6250 cubic inches.
If extra costs total $250:
Cost per cubic inch = $250 ÷ 6250 cubic inches = $0.04 per cubic inch.
Item A (5000 cubic inches): 5000 × $0.04 = $200 allocated
Item B (1250 cubic inches): 1250 × $0.04 = $50 allocated
Required Data Fields
Product Length, Width, and Height: All three dimensions must be accurately recorded.
How to Enter Product Dimensions (Excel):
Enter dimensions as
LengthxWidthxHeightin inches.Example:
10x12x8or10.5x12.2x8
When Allocation Happens
You select these allocation methods when entering extra costs on a Supplier Receiving Report. For each landed cost (like freight or duties), you pick how it should be distributed (weight, volume, quantity, value).
Why Accurate Data Matters
Accurate allocation relies heavily on correct product data (weights and dimensions). Inaccurate or missing information will cause incorrect allocation of costs, leading to inaccurate final unit pricing.
Make sure your Master SKU imports or RFQ entries have accurate weight and dimension data to ensure precise landed cost calculations.