A supplier invoice can match the purchase order perfectly while the reported sales margin tells an implausible story. Sometimes the system knows the item's purchase price but not its share of the journey to the warehouse. Sometimes the opposite happens: everything paid during importation is loaded into stock, including unrelated amounts or recoverable taxes.
Landed cost is not a label for collecting shipment spending indiscriminately. It is the result of classification and allocation: which amounts qualify as inventory cost, which products they belong to and what explains each product's share. IAS 2 provides the overarching principle of bringing inventory to its present location and condition. A cost schedule turns that principle into reviewable amounts.
One container can conceal a margin distortion
Consider an illustrative shipment of 100 units of product A purchased for SAR 40,000 and 200 units of product B purchased for SAR 20,000. A weighs 200 kilograms in total; B weighs 800 kilograms. Qualifying freight is SAR 10,000, with weight assumed to be the appropriate allocation driver for this service.
A receives 20% of the freight, or SAR 2,000, and B receives 80%, or SAR 8,000. Before duties and other items, the calculation is:
| Product | Purchase cost | Allocated freight | Total cost | Unit cost |
|---|---|---|---|---|
| A: 100 units | 40,000 | 2,000 | 42,000 | 420 |
| B: 200 units | 20,000 | 8,000 | 28,000 | 140 |
Allocating by purchase value instead would assign approximately SAR 6,666.67 to A and SAR 3,333.33 to B. The total would still be SAR 70,000, but the apparent profitability of each product would change. Matching the allocation total to the invoice is therefore insufficient: the driver should reflect the service. If the carrier prices by volume or volumetric weight, examine that basis rather than automatically using actual weight.
Assign direct amounts before sharing common costs
An inspection invoice that relates to one product should not be spread across other products simply because they shared a container. Assign qualifying direct costs to the relevant item, then allocate only the common amounts. A service provider's invoice may itself need to be split into components; its general heading does not establish identical accounting treatment for every line.
Also review the delivery terms and the services included in the supplier's price. If a particular transport service is already included and then added again from a summary statement, inventory cost is overstated without any quantity discrepancy. Use service and document references to prevent duplication, not just supplier names: one provider may perform several different services for the same shipment.
Use the actual supporting documents and proper classification for duties and charges. Do not apply a single assumed rate to every product or treat the customs declaration value as a ready-made substitute for the inventory carrying amount. Each figure has its own purpose and components. A reconciliation explaining the difference may be more useful than forcing equality.
Tax eligibility comes before allocation
ZATCA's imports and exports guideline links input tax deduction to activity, eligibility and documentation requirements, including customs evidence. Paying import VAT does not, by itself, establish a deduction entitlement. Examine the entity's circumstances, use of the goods and evidence before selecting the treatment.
Separate recoverable tax from inventory cost. Non-recoverable amounts require treatment according to the purchase and the conditions for inclusion in cost. Where goods support mixed uses, do not compress the question into one yes-or-no answer for the entire shipment. A tax apportionment may be needed independently of the freight allocation.
The cost schedule, tax return working paper and payment forecast are three views of the same transaction. Their totals may legitimately differ; the objective is a documented explanation, not forced agreement.
Before approving the cost, independently recalculate one high-value product and one heavy, lower-value product. This exposes the consequences of the allocation basis more effectively than reviewing the total alone. Then check received quantities, unresolved charges and whether any amount belongs to a different shipment.
If an additional invoice arrives after some units have been sold, do not automatically place the entire adjustment into the remaining stock. Assess the consequences for inventory and cost of sales under the facts and accounting policy, and retain the review trail. The objective is not an unchanging cost at any price. It is an explainable figure that supports pricing decisions and a credible reading of margin.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
