Handling Unexpected Inventory Cost Increases

Unplanned business expenses are a common reality, and their frequency increases when external forces drive greater uncertainty. To effectively manage rising inventory costs, having the right tools is essential. Unexpected events like new tariffs, escalating freight charges, or supply chain issues can put significant pressure on your bottom line if left unaddressed. The key challenge lies in deciding whether to absorb these costs or pass them along to your customers. To make informed decisions, clear visibility and accurate data are indispensable. 

The following explains three specific ways that Connected helps manage unexpected costs from tariffs and/or other cost increases.

1: Purchasing Landed Costs for Purchasing Inventory (Duty/Taxes/Tariffs)

Using the Connected Cost Factor is an excellent way to handle fluctuating inventory costs from such things as unexpected tariffs. Inventory can be received and have the external factors included in the item cost so inventory is valued with the externals.

For example, an inventory item purchased for $100 with 5% Freight and 25% Tariff would be received into inventory as follows:

Item Price: $100

Freight: $100 * 0.05 = $5

Tariff: $100 * 0.25 = $25

Total Item Cost: $130

Landed Costs can also be calculated with a foreign currency factor, in addition to the Freight and Taxes, if purchasing is done in a different currency.

By applying these factors at the time of receiving, inventory costing for the newly received inventory is accurate.

If you want to learn more about the Connected Cost Factor, click here -=> The Cost Factor - (Landed Cost)

2: Inventory Costing Methods with Volatile Costs

How inventory is costed can impact a businesses profitability, taxes, and financial reporting.  When costs are volatile from factors like tariffs, exchange rates, or freight costs, the chosen costing method can yield distinctly different results.

The following costing methods are available in Connected. 

Weighted Average Cost: Smooths out costs based on a weighted average. This is the simplest costing method and works great when inventory costs are relatively stable.  When sharp cost fluctuations are introduced, from things like tariffs or volatile exchange rates, weighted average can become skewed, especially when inventory is already on hand at the pre-tariff costs. Considering the example in the previous section, if 1 item was received at $105 and 1 item was received at $130, the Average Cost would be $118/item. If one item was sold on a single invoice, the total cost would be $118.

FIFO (First-In First-Out): Aligns with most natural flows of inventory. The inventory that is first received is the first to be relieved when sold. Inventory goes in and out at the exact cost  and shows higher profits when costs rise but can inflate taxable income.  Considering the example in the previous section, if 1 item was received at $105 and 1 item was received at $130, the items would be relieved at the cost they were received at. If one item was sold on a single invoice, the item cost would either be $105 if it was received first, or $130 if it was received second.

*Note:  FIFO is the default costing method in Connected

Specific Costing: Based on FIFO specific costing tracks costs by Lot (batch) and/or Serial number.  When an item is sold, the exact lot(s) and serial number(s) must be specified which, in turn, uses the exact cost.  By doing this, the exact costs per item are used, without using the FIFO method. Considering the example in the previous section, if an item was tagged to lot A, the item would be relieved at the specific cost of $105. If an item was tagged to lot B, it would be relieved at $130.

Choosing the Right Approach

In a time of volatile costs, the best inventory costing approach typically points at FIFO and/or Specific Costing. Understanding your options, limitations of the current accounting systems costing, and Accountant's advice are important in making costing decisions and/or changes.

3: Selling: Assessing Customer Surcharges or Increasing Prices

When costs rise, businesses often have to adjust pricing to maintain margins. Connected allows companies to quickly update pricing across products and services while keeping historical pricing data for reference. This ensures transparency and helps prevent underpricing that could erode profitability.

1: Assess a Surcharge - Leave Item Prices the Same

If keeping your selling prices unchanged is important, then assessing a surcharge may be the best way to recoup the additional costs from external factors such as tariffs.  Connected surcharges are designated by item and by customer.  This means that a single invoice can have a mix of items with only some getting the surcharge, while others do not.

Read how Surcharges can help you here -=> Customer Surcharges.

Using this method may be ideal if there are multiple complex pricing structures used that are difficult to update or because the prices cannot change due to contractual obligations (aka contract pricing).

2: Increase Selling Prices - Pricing Update

Connected is equipped with multiple ways to update selling prices. One of the easiest is based on the Price Matrix. Price Matrixes are typically used for price levels and volume discounts.

Read how Sales Discounts work in Connected here -=> Sales Discount Options

Learn more about the Price Matrix here -=> The Price Matrix - An Overview

However, it can also be used to assess an instant percentage price increase based on Cost or current Selling Price. The following screen shows the setup to increase a specific group of item selling prices by 25%.

These days there is a lot of uncertainty about tariffs.  Connected can help you communicate any costs you need to pass on to your customers in a way that is clear and easy to understand.  In some cases a surcharge can be used to account for an increased cost (for example, a tariff).

Managing unpredictable inventory costs doesn’t have to mean sacrificing your margins or scrambling to update your pricing. With Connected, you gain the tools to respond quickly, cost accurately, and price confidently—even when external factors throw you a curveball.