Inventory Management

Cost Price and Purchase Price Explained: Key Differences

Confused about cost price vs. purchase price? This guide clarifies their differences, vital for accurate pricing, profit, and inventory. Learn how to track both for more intelligent business decisions.

June 10, 2025

Bhoomi Singh

What Is Cost Price?

Cost price is the total expense a business incurs to acquire or produce a product for sale.

It includes all direct and indirect costs, such as raw materials, labor, manufacturing overhead, utilities, and marketing, associated with acquiring and preparing the product for resale or production.

Whether you're a retailer, wholesaler, or manufacturer, understanding your cost price is fundamental to knowing how much you need to sell your product to make a profit.

What Does Cost Price Include?

The cost price is typically composed of:

Purchase price (what you paid your supplier)
Shipping & freight charges
Import duties & customs fees
Insurance during transit
Packaging and handling costs
Warehouse transfer or storage fees
Any transaction or payment processing fees during procurement

If you manufacture your own products, it may also include:

Raw materials
Direct labor
Factory overheads like rent, utilities, and machinery depreciation

Example: Real-World Cost Price Calculation

Let’s say you're importing kitchenware for your Shopify store:

Item	Cost
Supplier price per unit	$800
Shipping cost per unit	$100
Import duties	$50
Packaging and quality check	$25
Total Cost Price per Unit	$975

So, if you sell that item for $1,000, your margin is just $25, not $200, as it may appear if you only look at the supplier price.

Why Is Cost Price Important?

It tells you the minimum price you need to sell to break even.
It’s essential for accurate profit margin calculations.
It ensures your inventory valuation is realistic and audit-proof.
It helps you identify products that are eating into your profit due to hidden costs.

What Is Weighted Average Cost Price?

Your cost per unit changes when you buy the same product multiple times at different rates.

That’s where the Weighted Average Cost Price method comes in, it helps you maintain a consistent and realistic cost value for your inventory.

Rather than tracking each purchase separately, this method calculates the average cost per unit based on all purchases and stock received over time.

It’s one of the most widely used methods in inventory and accounting systems because it simplifies tracking while keeping your inventory valuation accurate.

How It Works

Let’s break it down with an example:

You purchase:

5 units at $10 each = $50
Then, 5 more units at $20 each = $100

Now, you have 10 units with a total cost of $150.

Weighted Average Cost Price = $150 ÷ 10 units = $15 per unit

Your cost price is now $15 per unit, even though you paid different prices at different times.

Every time you buy more stock at a new rate, the cost price recalculates using this weighted average formula.

It provides a more stable and accurate valuation for:

Your balance sheet
Cost of Goods Sold (COGS) calculations
Profit margin analysis
And any stock adjustment or audit process

How It Helps with Inventory Valuation

The weighted average cost price (WAC) method is commonly used to calculate the value of inventory on hand.

It ensures your stock is valued at a realistic average cost rather than the most recent or lowest purchase price.

The formula is simple:

Inventory Value = Quantity in Stock × Weighted Average Cost Price

What Is Purchase Price?

At its simplest, the purchase price is the amount you pay your supplier for a product.

It’s the number you’ll usually see on invoices or purchase orders, and it often feels like the "main" cost when you’re buying inventory.

But it’s only part of the full story.

The purchase price doesn’t include things like shipping, customs duties, or the cost of getting the product ready for sale. It’s just what the supplier charges you per unit.

Think of it as the base price tag before any extras get added on.

What Does Purchase Price Include?

The purchase price usually covers:

Base product cost set by the supplier
Any negotiated discounts or bulk pricing
Currency conversion fees, if included in the quote
Local sales tax (depending on country-specific rules)

It does not include:

Shipping and freight
Customs duties or tariffs
Packaging, inspection, or labeling
Insurance or additional surcharges
Handling fees or internal transport

Example: Understanding Purchase Price

Let’s say you’re sourcing yoga mats from a supplier:

Supplier quotes $600 per unit
You place a PO for 100 units
The invoice says @$60,000

That $600 per unit is the purchase price.

However, if you pay an additional $10,000 for freight and $5,000 in customs, your purchase price will be $600/unit.

Why Is Purchase Price Important?

Supplier comparison: Purchase price allows you to compare rates across suppliers before finalizing a deal. It’s helpful for procurement decisions.‍
Budgeting and cash flow planning: Since it reflects the immediate outflow of money for goods, purchase price is crucial when calculating how much cash you need to place orders.‍
Accounting and Purchase Order Management: Most procurement systems and ERPs use purchase price as the core value on purchase orders and invoices.‍
Starting point for cost tracking: Purchase price is the base layer in your cost structure. It’s what you build on to calculate the full cost (i.e., cost price).

What Is Landed Cost?

If you’ve ever felt like your products cost way more than what the supplier invoice says, you're not wrong. That’s where landed cost comes in.

Landed cost is the total expense of getting a product from your supplier’s door all the way to your warehouse.

It’s the real all-in cost, after accounting for shipping, duties, third-party fees, and everything else.

Knowing your landed cost is non-negotiable if you’re importing goods, using a fulfillment partner, or dealing with international supplier.

It’s the most comprehensive way to measure how much each unit actually costs you.

What Does Landed Cost Include?

Landed cost covers all costs incurred between the supplier and your warehouse:

Cost price (including purchase price, freight, duties, insurance)
Customs broker fees
Port handling or demurrage fees
Third-party logistics (3PL) receiving & storage charges
Currency conversion fees or bank charges
Any extra delivery surcharges or administrative overheads

If you think of cost price as your inbound cost, landed cost adds everything until that product is officially on your shelf.

Example: Real-World Landed Cost Calculation

Imagine you’re importing 3D printers from Germany:

Item	Cost (Per Unit)
Supplier price	$800
Freight & shipping (port-to-door)	$100
Import duties	$50
Insurance	$15
Port handling + broker	$20
3PL receiving & storage	$30
Total Landed Cost	$1,015

So even though the unit price was $800, your landed cost is actually $1,015. That’s the number you need to watch if you're trying to maintain healthy margins.

Why Is Landed Cost Important?

It gives you the complete picture of your actual costs.
It helps you set realistic prices, especially when importing.
It protects your profit margins from being eroded by “hidden” fees.
It’s essential for accurate inventory valuation if you sell across borders or use 3PLs.

Difference between These Prices

How to Track and Manage These Prices Accurately

Knowing the difference between purchase price, cost price, and landed cost is one thing.

But actually tracking them correctly in your day-to-day operations?

That’s where many businesses get tripped up.

Here’s how to keep everything organized without creating a spreadsheet nightmare.

1. Capture Additional Costs at the Right Time

One of the biggest mistakes businesses make is forgetting to allocate indirect costs like shipping or customs back to the product. These costs often show up later, after the invoice is paid.

To stay accurate:

Allocate freight and duty charges across the items in a shipment
Assign 3PL or port fees as part of the product’s receiving process
Don’t wait until the end of the month, record them as soon as you get the bill

2. Use Weighted Average for Fluctuating Costs

If your supply chain is dynamic, say, shipping costs vary, or you source the same product from multiple vendors, Weighted Average Cost (WAC) is a lifesaver.

It calculates a running average of what your stock actually costs over time, helping you:

Smooth out pricing fluctuations
Avoid over- or under-valuing inventory
Keep your margins realistic and consistent

3. Audit Your Prices Regularly

Every few months (or at least once a quarter), take time to:

Review purchase orders and landed cost allocations
Compare recorded prices vs actual supplier bills
Check that your selling prices still give you healthy margins

This keeps your financials clean and helps you avoid surprise losses from creeping logistics costs.

4. Use an Inventory Management System That Supports Cost Tracking

Manually juggling costs in spreadsheets can work for a while, but it doesn’t scale. As your product catalog grows and logistics become more complex, you’ll want a system that:

Lets you record purchase price per supplier
Supports cost price with shipping, duties, and packaging
Allows you to add landed cost components for each inbound shipment
Automatically updates your inventory valuation based on real inputs

Tools like Sumtracker make this easy by letting you assign true landed costs per SKU, even when items come from different suppliers or shipments.

Conclusion

While these prices may sound interchangeable, they serve very different purposes, and knowing the distinction can make or break your business decisions. Each one plays a role, but only cost price and landed cost give you the full picture needed for accurate margins, smart pricing, and reliable inventory valuation.

Understanding these helps you price accurately, manage your inventory better, and protect your profit margins.

Whether you’re a growing eCommerce brand or managing complex supplier relationships, tracking these values separately and correctly isn’t just good practice. It’s essential for long-term profitability and financial clarity.

With the right systems in place, like modern inventory management platforms, keeping track of these numbers becomes second nature.

FAQS

1. Can landed cost and purchase price be the same?

Yes, landed cost and purchase price can be the same, but only if there are no extra costs like shipping, duties, or fees. This is rare, especially in international or bulk orders.

2. How is cost price calculated in inventory systems?

Most inventory tools use the weighted average method, which updates the cost price based on new stock received at varying purchase prices.

3. Can I have multiple purchase prices for the same product?

Yes. If you buy from different suppliers or at different times, each transaction can have a different purchase price.

4. Should I use cost price or purchase price for pricing decisions?

Always use cost price to ensure you're covering all expenses and protecting your margins.

5. What happens if I ignore the difference between cost and purchase price?

You risk miscalculating profit margins, underpricing products, and generating inaccurate financial statements, which can hurt your business in the long run.

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Aspect	Purchase Price	Cost Price	Landed Cost
Definition	Supplier's base price per unit	Total cost to procure the product	Total cost to get product from supplier to your warehouse
Includes shipping & freight?	❌	(Optional)	✅
Includes duties & import taxes?	❌	(Optional)	✅
Includes packaging & handling?	❌	(Optional)	❌
Includes manufacturing & labor cost?	❌	✅	✅
Includes port/3PL fees?	❌	❌ (usually not)	✅
Used for supplier comparison?	✅	❌	❌
Used in purchase orders?	✅	❌	❌
Used for pricing strategy?	❌	✅	✅
Used in inventory valuation?	❌	✅	✅