Accounting Best Practices, Fifth Edition

9–14. Report on Landed Cost Instead of Supplier Price

When the purchasing department focuses exclusively on reducing the purchase price charged by suppliers, it is not seeing the entire expense associated with bringing a product to the company. There is also the transportation cost associated with the purchase, as well as the lot sizes in which items are shipped (and associated storage requirements), damage incurred while in transit, the potential for foreign exchange losses, and shipping insurance. For example, the purchasing department may use an overseas supplier in an attempt to reduce the per-unit cost of an item. However, by doing so, it must order in much larger lot sizes and several weeks earlier than was previously necessary. It must also pay for shipping insurance, as well as the services of an international shipping broker. The net result is no change in the total cost of the product once it arrives at the company’s receiving dock.

The solution for the accounting department is to focus the company’s attention on the landed cost of purchased items rather than the supplier price. By doing so, the purchasing department gains a better understanding of the total cost of bringing items to the company, and avoids incorrect purchasing decisions that might otherwise increase company expenses.

The downside is the extra work required by the accounting department. Rather than simply ...