WHAT IS THE COST OF NOT KNOWING YOUR COSTS?

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"The Ultimate Guide to Accurate Product Costs"

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5. Which shipping cost calculation method should you use?

Your bottomline depends on applying the right shipping calculation method. Without accurate preparation and tracking, you might find your bottomline sinking lower and lower. In fact, estimates show that your Cost of Good Sold will account for up to 20-30% of your total net sales.

When you look at the largest expenses selling on Amazon or any other marketplaces - The Selling Fees account for the the latest expense and the Cost of Goods Sold usually come in second, with advertising coming in third. An emphasis must be on the landed product costs, as a way to maintain a competitive edge and to increase profitability. Accurately calculating this requires determining which shipping (freight) cost calculation best suits the invoice, but business owners are often unsure about which method should be applied.

Let’s begin with setting a basic foundation. When you received the final invoice for shipping freight, there should be a pack list to go along with that shipment.

Before you can decide which shipping calculation method to use, you first need to understand the invoice.

Scenario #1:

↳ You receive an invoice from Fedex for $2,438.98.

↳ The contents of the shipment were 25 Cases and 100 Units Per Case (2500 Units) of ONE Product SKU.

↳ This calculation is $2,438.98 divided by 2500 Units = $0.98 (the cost per unit to ship).

This is a simple calculation, but as you start to expand, and have a portfolio of products - shipping products together makes sense, as it will drastically reduce shipping costs.

Scenario #2:

↳ You receive an invoice from XYZ Freight Forwarder for $8,438.98.

↳ The contents of the shipment were 163 Cases for multiple Product SKUs totalling 32,163 units.

↳ if you used the the above calculation to determine your unit price per product to ship, it would be $0.26.

Let's take a look at why that would be incorrect. The example below shows the difference between calculating 'Cost Per CBM' vs the 'Cost Per Unit'.

[ 'Cost Per CBM' vs the 'Cost Per Unit' ]

What do you need in order to calculate the the correct unit cost?

You need a copy of the invoice
You need a copy of the conrents of the shipment (Ie: a Pack List)
You need the shipping Calculator Spreadsheet

Businesses that are selling products often apply the shipping calculation method that provides the higher weight, otherwise known as the Weight (or Management) rule, or W/M rule. Once you have this basic information, we need to consider specific shipping formulas.

In the next chapter we will discuss:

Volumetric Weight and Cubic Meter (CBM) Formulas

The most efficient and effective formula for your business relies on the preceding factors. Two common measures for determining shipping rates are the Volumetric Weight formula and the Cubic Meter (CBM) formula. It is important for you to accurately determine which formula your specific products and shipments require.

During the shipping determination process, shipment carriers select the formula that provides the highest revenue. If you consider filling the cargo area of an airplane with large orders of low-density items, the carrier will not earn as much if they charge by straight volume. To combat this, they determine shipping in relation to volumetric weight, which is a more arbitrary calculation.

In fact, it is common for shippers to calculate shipping by two different formulas, and then charge the higher rate of the two.

Shippers might apply the formula for Volumetric Weight, otherwise known as dimensional weight (dim), when the products you are receiving cost more for their physical space than their weight during shipping. For example, if you are calculating the shipping cost of crates of fragile, decorative feathers, you would want to apply the Volumetric Weight formula, because it accounts for the fact that the crates take up more space on the cargo plane when compared to their overall weight.

The Cubic Meter formula (CBM) is also a common method of calculating shipments by marine freight. This process involves measuring the volume of the shipment. To operate this formula, you will need to know the length, width, height, and weight of your packages, and the potential sizes of shipping containers.

If you are still unsure of which calculation method might be best for you, the only way to know for sure is to run calculations for both. Once you do this, you can compare the gross weight of your products to the volumetric weight.

If you haven't already, gather some invoices from Suppliers, Shipping or any other invoices and we will dive into the next chapter.

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"The Ultimate Guide to Accurate Product Costs"

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Frequently Asked Questions

What is a dry container?

Dry containers (DC) are the most used type of container in the world: 90% of goods shipped by sea are loaded in dry containers. The 20-foot and 40-foot cargo containers are made of aluminum or steel and are suitable for all types of cargo. Aluminium containers have a slightly larger payload than steel, and steel dry containers have a slightly larger internal cube.

Dry container size and capacity

The specific dimensions and capacities of dry containers may vary depending on the container manufacturer, the age of the container and the container owner. The specifications listed below are representative of the majority of containers available.

Tare weight /ˈtɛər/, sometimes called unladen weight, is the weight of an empty vehicle or container. By subtracting it from the gross weight (laden weight), the weight of the goods carried (the net weight) may be determined. ... Tare weight is also used in body composition assessment when doing underwater weighing.

What does FCL mean in Shipping

Two of these include Full Container Load (FCL) and Less Than Container Load (LCL) shipping. FCL refers to shipments for which all goods in a container are owned by one party, while LCL involves multiple shippers' goods packed together.

What does LCL mean in shipping?

LCL (Less than Container Load) refers to a shipment that doesn't fill one 20 or 40ft standard container. The container is therefore loaded with cargo from multiple consignees. On arrival at the destination port, the goods are separated at a container freight station.

How is CBM calculated in China?

CBM – cubic meter is calculated by multiplying length, width and height of packages of goods. For example, if the length, height and width of a cargo is 2.3 meters, 1.4meters and 2 meters respectively, the volume of cargo is 2.3 X 1.4 X 2.00 = 6.44 CBM.

How do you calculate volumetric weight for shipping?

Volumetric weight can be calculated by multiplying the length, width and height of a parcel (in cm) and dividing that figure by 5000 (some carriers use a divisor of 4000). You may often find that the price of your shipment is dictated by the volumetric weight of your parcel(s) rather than the physical weight.