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Your average cost per unit should be based on your product's landed cost - what it cost you get one unit sitting in your warehouse ready to sell: the product itself plus everything you spent getting it there. It's the number to enter as your cost per unit in Margins, because it's the number that makes your margins honest.
Use the unit price on the vendor invoice instead and you'll understate COGS by whatever freight and duties cost you, which on imported goods is often 15–30% of the total. This article covers what belongs in landed cost, what doesn't, and how to work it out.
In this article
What to include
What to leave out
How to calculate it
FAQs
1. What to include
Everything up to and including the moment the unit reaches your warehouse:
The direct cost of the unit: the cost per unit for the finished goods or for all the raw materials that go into it.
Manufacturing and assembly: labor, contract manufacturers, and production overhead.
Inbound freight: shipping from your vendor or factory to your warehouse.
Duties, tariffs, and import taxes.
Insurance on the inbound shipment.
Vendor and customs broker fees.
Product packaging: the packaging that is part of the product, like the jar the jam is sold in.
The simple way to think about it: if you wouldn't have spent it unless you were buying this inventory, and you spent it before the goods hit your shelf, it's landed cost.
2. What to leave out
Everything after the unit is in your warehouse, and everything that isn't tied to a specific unit:
Outbound shipping to customers.
Delivery packaging: boxes, mailers, and bubble wrap.
Warehouse rent, 3PL storage, and pick-and-pack fees.
Marketing, advertising, and sales channel fees.
Overheads that aren't tied to production: software, salaries outside production, office costs.
These are real costs and Margins tracks them elsewhere, from your transactions. They just aren't COGS, so folding them into your cost per unit double-counts them and distorts your product margins.
3. How to calculate it
Add the direct cost of the batch to the indirect costs of getting that batch in, then divide by the number of units.
You purchase 100 units of Product A: $2,000
Inbound freight, duties, and broker fees for that shipment: $500
The landed cost per unit is ($2,000 + $500) ÷ 100 = $25.
When one shipment carries several SKUs, split the indirect costs across them. Two allocation methods are defensible, and either is fine as long as you're consistent:
Method | How it works | Best when |
By unit count | Divide the freight bill by total units in the shipment | Your products are similar in size and weight |
By value | Allocate freight in proportion to each SKU's share of the invoice value | Your products vary a lot in price |
Once you have the number, enter it in Margins with the date it starts applying. See Adding your cost per unit.
Recommended: recalculate your landed cost whenever a vendor price, freight rate, or tariff changes, and add it as a new dated cost rather than editing the old one. That keeps your historical margins intact and your current margins accurate.
FAQs
What if I don't know my freight costs at the unit level?
What if I don't know my freight costs at the unit level?
Use your best estimate from the most recent shipment and refine it later. An approximate landed cost is far more accurate than a vendor unit price, and much more accurate than no cost at all.
How often should I update it?
How often should I update it?
Whenever the underlying cost changes. For most brands that's every new production run or every time a tariff rate moves.
Do I need to update it retroactively?
Do I need to update it retroactively?
No. Add the new cost with the date it took effect. Margins keeps applying the old cost to units that sold before then.
Where do tariffs go if I pay them separately from the shipment?
Where do tariffs go if I pay them separately from the shipment?
Into landed cost, on the units they relate to. A tariff is part of what the goods cost you to import.