Allocation methods: by value, weight or volume
Learn how landed costs are distributed across inventory items using three different methods.
Overview
When you record landed cost charges on a purchase, Usystems must divide those charges among your inventory items so that each item carries its fair share of the total cost. There are three allocation methods, each suited to different types of charges and business scenarios.
Method 1: By Value (Proportional to Purchase Price)
How it works: The total landed cost is divided proportionally based on the purchase price of each item. An item that costs 50% of the total order value receives 50% of the landed costs.
Formula: Item allocated cost = (Item purchase price / Total purchase price) × Total landed cost
Best for:
- Customs duties (often based on declared value of goods)
- Import taxes and VAT
- Insurance premiums (proportional to goods value)
- Any charge that logically relates to the financial value of goods
Example: You import goods worth $10,000 with $1,000 in customs duty. Item A costs $6,000 and Item B costs $4,000. Item A receives $600 of the customs duty; Item B receives $400.
Method 2: By Weight (Proportional to Physical Weight)
How it works: The total landed cost is divided proportionally based on the weight of each item. An item that weighs 40 kg out of a 100 kg shipment receives 40% of the landed costs.
Formula: Item allocated cost = (Item weight / Total weight) × Total landed cost
Best for:
- Freight charges that are weight-based
- Air cargo fees
- Any charge where shipping cost depends directly on physical weight
- Products where weight is a primary characteristic (bulk materials, pharmaceuticals in bulk)
Example: You ship goods totaling 500 kg with $500 in freight. Product X weighs 250 kg, Product Y weighs 150 kg, and Product Z weighs 100 kg. Product X receives $250; Product Y receives $150; Product Z receives $100.
Method 3: By Volume (Proportional to Physical Space)
How it works: The total landed cost is divided proportionally based on the space (volume) occupied by each item. An item that takes up 25% of the shipping container receives 25% of the landed costs.
Formula: Item allocated cost = (Item volume / Total volume) × Total landed cost
Best for:
- Container shipping charges (charged per cubic meter or per container)
- Warehousing fees during receipt
- Any charge where physical space is the limiting factor
- Products with high bulk relative to weight (foam, boxes, textiles)
Example: You charter a shipping container with 40 cubic meters of space and pay $2,000. Product A takes 16 cubic meters, Product B takes 12 cubic meters, Product C takes 12 cubic meters. Product A receives $800; Product B receives $600; Product C receives $600.
Choosing the Right Method
In practice, you may have multiple landed cost charges, each with its own most appropriate method:
| Charge Type | Recommended Method | Reason |
|---|---|---|
| Customs duty | By Value | Customs duty is typically assessed on declared value |
| International freight | By Weight | Most carriers charge based on weight or volumetric weight |
| Container shipping | By Volume | Charged by container size or cubic meter |
| Insurance | By Value | Premiums are calculated as a percentage of declared value |
| Port/handling fees | By Weight | Often proportional to throughput/weight |
| Import taxes | By Value | Tax is based on the value of imported goods |
Impacts on Cost and Profitability
Choosing a different allocation method will distribute costs differently and thus change:
- The unit cost recorded for each inventory item
- The cost of goods sold (COGS) when you sell different items
- Your pricing decisions for those items
- Your profit margin analysis by product
Therefore, it is important to select the allocation method that most fairly represents how the charge was actually incurred.
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