Meaning
Financial metrics that track the total expense of acquiring a raw material include both the purchase price and all transport fees. This calculation represents the material landed cost, which governs the total value of inventory as it arrives at the factory gate. The metric excludes internal factory handling and subsequent processing costs.
Cost Components
The total expense of getting raw material to the warehouse involves several distinct charges. Calculating the material landed cost requires adding freight, customs duties, insurance, and brokerage fees to the base price of the resin or metal. This comprehensive figure provides a true picture of the raw material’s cost.
Without these additions, the purchasing department might select a supplier whose low unit price is offset by high shipping costs.
Procurement Strategy
Sourcing materials globally can introduce significant price volatility due to changing shipping rates and tariffs. Monitoring the material landed cost helps procurement teams evaluate whether to buy from local or international suppliers. While a local supplier may have a higher base price, their lower transportation costs can result in a more attractive overall cost.
This comparison is vital for maintaining healthy profit margins during supply chain disruptions.
Inventory Valuation
Accounting departments rely on these total cost figures to value the company’s assets accurately. The material landed cost is used to determine the cost of goods sold and the value of raw material inventory on the balance sheet. Incorrectly calculating this figure can lead to distorted profit statements and tax errors.
It is therefore essential to record all shipping expenses in the calculation.
