Cost Prices, Landed Cost, Cost of Goods Sold

This article offers a comprehensive, industry-standard definition of each cost type, including their components, calculations, and interrelationships.

Introduction

Retail and procurement operations rely on a nuanced understanding of various cost types to manage profitability, pricing, and inventory effectively. The terms Purchase Price, Cost Price, Landed Cost, Cost of Goods Sold (COGS), and Manufacturing Cost are fundamental yet often used ambiguously across industries and regions.

It further explores how these costs flow through retail workflows, their impact on margin calculations, and how they are handled in retail software systems. The goal is to synthesize this knowledge into actionable recommendations for integrating these cost structures into a retail application that balances simplicity and correctness while aligning with accounting and procurement standards

Definitions and Industry Standards

Manufacturing Cost

Formal Definition: The total cost incurred in the process of manufacturing a product, including direct materials, direct labor, and manufacturing overhead.
Key Components: Raw materials, labor, factory overhead, equipment depreciation, and other manufacturing-related expenses.
Usage Context: Applies primarily to brands or private-label retailers that produce their own goods; used in product costing and COGS calculation.
Relationships: Manufacturing Cost is a component of COGS for manufacturers; distinct from Purchase Price or Cost Price for retailers who do not manufacture.
Impact on Margins: Influences gross margin by defining the cost basis for manufactured goods. Example: Direct materials $5 + labor $3 + overhead $2 = Manufacturing Cost of $10 per unit.

Purchase Price

Formal Definition: The price paid by a retailer to a supplier for goods or services, excluding any additional costs such as freight, duties, or taxes.
Key Components: Base unit price, discounts, rebates, and any supplier-specific pricing terms.
Usage Context: Used primarily during procurement, purchase order creation, and supplier negotiations.
Relationships: Purchase Price is the starting point for calculating Cost Price and Landed Cost.
Impact on Margins: Directly influences COGS and gross margin calculations.

Cost Price

Formal Definition: The total cost incurred to acquire or produce a product, including the Purchase Price plus all direct costs associated with bringing the product to a saleable state.
Key Components: Purchase Price + freight, duties, taxes, and any direct acquisition costs (e.g., inbound logistics).
Usage Context: Used in inventory valuation, financial reporting, and COGS calculation. Relationships: Cost Price = Purchase Price + additional direct costs; it serves as the basis for Landed Cost and COGS.
Impact on Margins: Affects gross margin and net margin by defining the cost basis for goods sold.
Example: Purchase Price $10 + freight $1 + duties $0.50 + taxes $0.50 = Cost Price of $12.

Landed Cost

Formal Definition: The total cost of a product once it has arrived at the retailer’s destination, including all costs incurred in the procurement, transportation, and handling process.
Key Components: Cost Price + freight, insurance, inbound warehouse handling, customs duties, taxes, and any other ancillary costs.
Usage Context: Used for financial reporting, inventory management, and pricing decisions.
Relationships: Landed Cost = Cost Price + delivery and handling costs.
Impact on Margins: Represents the true cost of goods available for sale, impacting gross and net margin calculations.
Example: Cost Price $12 + freight $1 + insurance $0.20 + handling $0.80 = Landed Cost of $14.

Cost of Goods Sold (COGS)

Formal Definition: The direct costs attributable to the production or acquisition of goods sold by a company during a specific period.
Key Components: Direct materials, direct labor, manufacturing overhead, and other direct costs tied to goods sold.
Usage Context: Used in financial reporting to calculate gross profit and in inventory accounting methods (FIFO, LIFO, weighted average).
Relationships: COGS is derived from Cost Price or Landed Cost, depending on the retailer’s accounting method.
Impact on Margins: Directly affects gross margin and net margin by representing the cost of goods sold against revenue.
Example: Beginning inventory $10,000 + purchases $5,000 - ending inventory $3,000 = COGS of $12,000.

Cost Flow and Relationships

Understanding how these costs flow through retail and procurement workflows is essential for accurate financial management and decision-making:

Procurement Stage: Retailers negotiate and pay the Purchase Price to suppliers. This price is the starting point for all subsequent cost calculations.
Inventory Valuation: The Cost Price is calculated by adding direct acquisition costs to the Purchase Price. This cost is used to value inventory on the balance sheet.
Delivery and Handling: Additional costs such as freight, insurance, and warehouse handling are added to the Cost Price to determine the Landed Cost, representing the total cost to bring goods to the retailer’s location.
Sales and Financial Reporting: When goods are sold, the Cost of Goods Sold (COGS) is recognized based on the inventory accounting method (FIFO, LIFO, weighted average). COGS is derived from the Cost Price or Landed Cost, depending on the retailer’s policy.
Manufacturing Context: For retailers that manufacture products, Manufacturing Cost is the primary cost component, which is then used to calculate COGS and margins.

Margin Calculations: Gross Margin and Net Margin

Gross Margin

Gross margin is the difference between revenue and COGS, expressed as a percentage of revenue. It measures the profitability of the core product sales before operating expenses.

Calculation: Gross Margin = (Revenue - COGS) / Revenue × 100%
Cost Basis: Typically calculated using Landed Cost or Cost Price as the COGS basis, depending on the retailer’s accounting method and business model.
Industry Practice: Landed Cost is the most common basis for gross margin calculation because it reflects the true cost of goods available for sale.
Example: Revenue $100,000, COGS (Landed Cost) $70,000 → Gross Margin = 30%.

Net Margin

Net margin is the profit remaining after all operating expenses, taxes, and other costs are deducted from revenue. It represents the overall profitability of the business.

Calculation: Net Margin = (Net Profit) / Revenue × 100% Additional Costs: Operating expenses (rent, wages, marketing), taxes, interest, and other overheads.
Usage: Net margin is used to assess overall business profitability and financial health.
Example: Net Profit $8,000, Revenue $100,000 → Net Margin = 8%.

How Cost Prices are used in Shelf Planner

In Shelf Planner, the cost structures are designed to reflect the real-world complexity of retail procurement while keeping the user experience intuitive and actionable. Currently, the platform supports Manufacturing Costs, Cost Price, and Landed Cost, each serving a distinct role in helping retailers optimize their inventory and profitability.

Manufacturing Costs are primarily used by brands or retailers who produce their own products or private-label goods. This cost type captures all expenses directly tied to production—such as raw materials, labor, and overhead—allowing users to accurately assess the cost basis of their in-house products.

For retailers who source products from suppliers, the Purchase Price is the foundational cost, representing the amount paid to suppliers before any additional expenses. When creating purchase orders (POs) or receiving goods, Shelf Planner enables users to apply relevant surcharges—such as freight, duties, and handling fees—to automatically derive the Landed Cost. This ensures that retailers have a clear view of the total cost of bringing products into their inventory, which is critical for setting competitive prices and calculating true profitability.

The Landed Cost feature is particularly valuable for retailers managing global supply chains or dealing with variable logistics expenses. By incorporating these surcharges at the PO level, Shelf Planner provides a dynamic and accurate cost basis for inventory valuation and margin analysis.

While Cost of Goods Sold (COGS) is not yet active in the platform, its upcoming release in Fall/Winter 2025 will further enhance financial insights by directly linking inventory costs to sales performance. This will allow you to track gross margins more precisely and make data-driven decisions about pricing, promotions, and supplier negotiations.