Distinguishing Cost of Goods Sold (COGS) and Landed Cost in a Supply Chain
There are important differences between “landed cost” and “costs of goods sold.” In the context of a supply chain, the terms cost of goods sold (COGS) and landed cost represent distinct concepts that play important roles in the financial and strategic aspects of the supply chain process. While both concepts are connected to the expenses incurred during the production and distribution of goods, they focus on different stages and components of the supply chain. In this overview, we explore the differences between landed cost and COGS within a supply chain context.
| Landed Cost | Cost of Goods Sold (COGS) | |
|---|---|---|
| Definition | This cost includes the product cost plus the costs of logistics, such as warehousing, transportation, and handling fees. | An accounting classification useful for determining the amount of direct materials, direct labor (for manufacturing), and allocated overhead associated with the products sold during a given period of time. See: cost of sales. |
| Calculation | Landed Cost = Product/Material Cost + Freight Charges + Customs Duties + Taxes + Handling Fees + Other Additional Costs (Insurance, etc.) | COGS = Beginning Inventory + Purchases during the Period – Ending Inventory |
| Differences | – All expenses incurred to get goods to a destination, including procurement, transportation, import/export duties, etc. – Calculated per shipment or batch of goods – Product-specific calculation – Used to evaluate total costs to warehouse and support strategic sourcing / international trade decisions | – Direct costs related to production – Aggregate overview of overall production costs, not product specific – Assessed over a specific accounting period, such as a month or a year – Used to assess the profitability of the production process |
Landed Cost
Definition: Landed cost represents the total cost incurred by a company to acquire a specific product and bring it to its final destination – typically the warehouse. It includes not only the actual cost of the product but also all additional expenses incurred during the procurement and transportation process, such as shipping fees, customs duties, taxes, handling charges, and insurance costs. Understanding landed cost is an important step to add to any sourcing checklist.
Role in the Supply Chain: Landed cost is particularly relevant during the distribution and logistics phases of the supply chain. Landed cost considers the expenses incurred beyond the initial production, such as transportation, import/export duties, and other costs associated with bringing the product to the intended destination. Calculating the landed cost accurately is crucial for evaluating the true cost of goods at the point of sale, setting pricing strategies, understanding your actual profit margins, and making informed decisions about sourcing and distribution channels.
Cost of Goods Sold
Definition: COGS refers to the direct costs incurred in producing or purchasing the goods that a company sells during a specific period. It encompasses expenses directly related to the production process, such as raw materials, labor (often not included in retail calculations), manufacturing overhead, and direct labor costs.
Role in the Supply Chain: COGS primarily focuses on the production phase of the supply chain. It provides insights into the cost structure associated with the creation of goods, which is vital for determining the gross profit margin and assessing the efficiency of the production process. Companies use COGS to evaluate their pricing strategies, optimize production processes, and make informed decisions about inventory management.
Key Differences Between Landed Cost and COGS
- Scope and Focus: COGS primarily focuses on the direct costs related to production. Landed cost considers a broader spectrum of expenses incurred during the procurement, transportation, and distribution of goods.
- Timeframe: COGS is typically assessed over a specific accounting period, such as a month or a year, to determine the cost of goods sold during that period. Landed cost is calculated per shipment or batch of goods and is focused on the entire journey of the product to its final destination.
- Application: COGS is utilized to assess the profitability of the production process and set pricing strategies. Landed cost is critical for evaluating the overall cost of goods at the point of sale. Landed cost is also used for making strategic decisions related to international trade and distribution.
- Components: COGS includes direct production costs such as raw materials, labor, and manufacturing overhead. Landed cost includes transportation fees, customs duties, taxes, insurance, and other expenses associated with getting the product to its destination.
Landed cost and both COGS are essential metrics in supply chain management. If you do not understand the landed cost of your products or your overall COGS, it is difficult to understand your actual margins and determine cost savings opportunities. Both landed cost and COGS address different aspects of the supply chain process. While COGS pertains to direct production costs, landed cost encompasses the entire cost structure associated with the procurement, transportation, and related fees to get the product to a destination. Understanding the distinctions between these concepts is crucial for making informed decisions regarding sourcing, pricing, inventory management within the supply chain.
Need help determining you landed cost or COGS? Schedule a call with a senior supply chain professional on our team.