Inventory Valuation, COGS, and Supply Chain Accounting

Inventory valuation drives gross margin reporting, balance sheet accuracy, and corporation tax position. Most small e-commerce sellers track only the unit cost paid to the supplier; the true landed cost (supplier price + freight + duty + insurance + 3PL inbound fees) is materially larger and produces a different profit picture. FIFO vs AVCO valuation methods produce different reported margins. Dead stock provisions, goods-in-transit at year-end, and 3PL billing reconciliation each affect the reported figures.

This pillar covers the inventory and COGS accounting issues for UK e-commerce. Each section links to a detailed companion piece.

Calculating true landed cost

Landed cost components for typical UK importer:

• Supplier unit price (FOB or EXW depending on Incoterms).
• Freight cost: typically 5-15% of supplier price for sea freight from Asia; air freight 25-40%.
• Duty: depends on commodity code; typically 0-15% for most consumer goods.
• Import VAT: recoverable, but cash-flow impact at the border (mitigated by PVA).
• Insurance: 0.5-1% of cargo value typically.
• 3PL inbound fees: receipt, putaway, labelling fees per unit.

FIFO vs AVCO inventory valuation

UK GAAP (FRS 102 Section 13) permits FIFO and AVCO. LIFO is not permitted. Choice should be applied consistently and disclosed in accounting policies.

Dead stock provisions

Inventory not selling at expected velocity needs provision against carrying value. Triggers: aged stock, discontinued lines, damaged goods, packaging changes that obsolete prior stock. The provision reduces inventory and increases COGS in the period the slow-moving status becomes apparent.

Goods in transit at year-end

Stock ordered from suppliers but not yet received at year-end is goods in transit. Whether it is the seller's asset depends on Incoterms:

• EXW (Ex Works): risk transfers at supplier's premises. Buyer's asset from collection.
• FOB (Free on Board): risk transfers when goods cross the ship's rail. Buyer's asset from loading.
• CIF (Cost, Insurance, Freight): risk transfers at destination port arrival.
• DDP (Delivered Duty Paid): risk transfers at buyer's premises. Supplier's asset until delivery.