Why fulfillment costs don’t belong in inventory or COGS
As your brand grows, understanding how different types of costs flow through your financials is critical. One of the most common points of confusion for early-stage CPG and eCommerce operators is whether fulfillment expenses — like shipping to customers, pick-and-pack fees, or 3PL charges — should be capitalized into inventory and included in COGS.
The short answer: they shouldn’t.
Let’s break it down.
What are fulfillment expenses?
Fulfillment expenses are costs incurred to deliver finished goods to the end customer. These typically include:
Pick and pack fees at a 3PL (for outgoing orders)
Shipping and postage for customer orders
Packaging and boxing materials for outbound shipments
Last-mile delivery or courier costs
These expenses occur after inventory is ready for sale. Their purpose is to facilitate the sale
— not to bring inventory into a saleable condition.
Note: If your 3PL charges fees for inbound receiving (e.g., unloading and warehousing products upon arrival), those may be considered part of landed cost. But outbound pick-and-pack fees are fulfillment expenses.
How are they different from landed costs?
Landed costs refer to all expenses required to bring inventory to your warehouse and get it ready for sale. These are capitalizable — meaning they’re added to the value of your inventory on the balance sheet and only hit your income statement when the product is sold.
Typical landed costs include:
Freight and shipping from suppliers
Import duties and customs
Insurance during transit
Drayage and handling fees
Raw material and component costs
Once sold, landed costs flow from inventory to COGS on your income statement.
Accounting treatment: fulfillment vs. inventory costs
Type of cost | Capitalized into inventory? | Hits COGS? | Hits P&L directly? |
Landed costs | ✅ Yes | ✅ Yes | ❌ No |
Fulfillment expenses | ❌ No | ❌ No | ✅ Yes |
Fulfillment expenses are expensed as incurred — meaning they hit your Profit & Loss (P&L) statement immediately when the cost is billed. They do not sit on the balance sheet as part of inventory and are not included in COGS.
This treatment aligns with U.S. GAAP (ASC 330) and IFRS (IAS 2), which define inventory costs as those “directly attributable to bringing inventory to its present location and condition for sale.” Fulfillment costs occur after that point, and are therefore considered period expenses.
Example: why this distinction matters
Let’s say you’re a skincare brand that imports facial cleansers from a manufacturer in Korea:
You pay $5 per unit for the product
You incur $1 per unit in inbound freight and customs — a landed cost
You pay $3 per unit to ship each order to customers — a fulfillment cost
Accounting treatment:
The $6 ($5 + $1) is added to your inventory value and recognized as COGS when the product is sold.
The $3 shipping cost is not part of COGS — it is recorded as a Selling or Fulfillment Expense on the P&L.
Why this matters for your financials
Gross margin accuracy:
Gross margin only includes COGS (which excludes fulfillment). If you include fulfillment in COGS, you’ll understate gross margin and make comparisons to peers inaccurate.
Contribution margin clarity:
Fulfillment is part of your contribution margin — the amount left after all variable costs, including shipping to the customer. Understanding this helps you know your real unit economics.
Cash flow & planning:
Since fulfillment expenses hit your P&L as soon as they’re incurred, they impact your bottom line quickly — especially during peak seasons like Q4.
Investor & lender confidence:
Investors, accountants, and lenders expect clean, GAAP-aligned financials. Misclassifying fulfillment expenses as COGS can signal weak financial discipline or raise red flags during due diligence.
How to track this in QuickBooks or NetSuite
In QuickBooks:
Create a separate Expense account called “Fulfillment Expense” or “Shipping to Customers.”
Use Classes or Tags to segment by channel or product line for better margin analysis
In NetSuite:
Create a non-inventory cost category for fulfillment.
Use Saved Searches or Custom Reports to isolate fulfillment costs from COGS and marketing spend.
💡 Pro Tip: Keep fulfillment expenses in a separate account from COGS to maintain clear gross margin reporting — this makes monthly reporting, fundraising, and unit economics modeling much easier.
Summary
Concept | Treatment |
Fulfillment Expenses | Expensed immediately on the P&L |
Landed Costs | Capitalized into inventory → flow to COGS |
COGS Includes? | ✅ Landed Costs ❌ Fulfillment |
Why It Matters | Accurate margins, cleaner financials |