Co-Packer and 3PL Economics: Landed COGS Done Right

Last updated October 2026.

The short answer

Landed COGS for a CPG brand is everything it costs to get one finished unit made and sitting in your 3PL ready to sell: ingredients, packaging, the co-packer's fee, run setup, inbound freight, duties on imported inputs, and 3PL receiving. Those costs go into inventory and hit cost of goods sold when the unit sells. 3PL storage, pick and pack, and overhead stay out. Get the split wrong and your gross margin is fiction.

Why does your gross margin not match what the co-packer quote said?

Your gross margin does not match the co-packer quote because the quote is one line of a unit cost that has six or seven lines. The co-packer prices its labor, line time, and sometimes the ingredients. It does not price the freight that brought your packaging to its dock, the setup fee on a short run, the truck from its dock to your 3PL, or the receiving fee your 3PL charges to put the pallets away.

Most founders model margin off the co-packer invoice, then wonder why the P&L comes in several points lower. The other common version runs the opposite way: the books bury freight and setup fees in operating expenses, so gross margin looks better than the business actually is, right up until a lender or buyer rebuilds it.

There are two ways a co-packer prices the work, and each changes where your cost data lives:

1. Tolling. You buy and own the ingredients and packaging, ship them to the co-packer, and pay a fee for labor, equipment, and facility time. Your own purchasing records become the source of most of your cost.
2. Turnkey. The co-packer buys the inputs and sells you finished product at one price per case. Simple to book, harder to check line by line, because the ingredient markup is inside the price.

Many brands run a hybrid: the co-packer sources ingredients and the brand supplies packaging. That works fine as long as each piece has its own account.

What goes into landed cost per unit?

Landed cost per unit is every cost required to bring a finished unit to the place and condition where it can be sold. That is the language of the international inventory standard, IAS 2, and US GAAP (ASC 330) follows the same principle. When the FASB updated its inventory rules in Statement 151 in 2004, it deliberately moved its wording toward IAS 2.

Here is one illustrative unit made under a tolling arrangement, from raw inputs to a pallet put away at the 3PL. Every dollar figure is illustrative arithmetic, not a benchmark.

Two lines in that table are where most CPG books go wrong.

Why does the setup fee belong in the unit cost?

The setup fee belongs in the unit cost because the unit cannot exist without it, and run size changes it more than any other line. A $3,000 setup fee adds $0.15 a unit on a 20,000 unit run and $3.00 a unit on a 1,000 unit run. A brand that books setup fees as an expense in the month they are paid makes small runs look cheap and big runs look expensive, which is backward.

Why does freight into the 3PL count but freight out does not?

Freight into the 3PL counts because it is part of getting the product to a sellable location. Once the unit sits on a shelf at the 3PL, it has arrived. Everything after that, from storing it to shipping it to a customer, is a cost of holding or selling it, not of making it.

Which co-packer and 3PL charges stay out of inventory?

Charges that do not help make the unit, or that come after the unit is ready to sell, stay out of inventory and hit the P&L in the month they are incurred. IAS 2 lists storage costs (unless storage is a necessary step in production), selling costs, administrative overhead, and abnormal waste as costs to expense rather than capitalize.

The normal-versus-abnormal line matters for food brands. If your co-packer normally loses about 3 percent of a run to startup waste and trim, that loss is part of the cost of the good units and belongs in the landed cost. If a bad run loses 12 percent, the extra 9 percent is not inventory. It is a loss that month, and it is often a conversation with the co-packer about who pays for it.

How much margin moves when the lines are in the wrong place?

Gross margin moves by several points when landed costs are booked in the wrong place, even though cash and net income for the year barely change. Take the $2.46 unit above, sold at a net revenue of $4.15 after retailer, distributor, and trade, the same retail price chain used in DTC to retail: what changes in your P&L. Illustrative arithmetic again.

That is a 23 point spread from three different bookkeeping habits applied to the same product. The middle row is the dangerous one, because it feels good. On a 20,000 unit run it moves $7,200 of real cost below gross profit, where it hides inside a general freight or fees account nobody reviews by SKU.

Timing creates a second distortion. When the setup fee and inbound freight are expensed in the month they are paid, the production month looks terrible and the next two months look great, even though the same units are selling at the same price. A monthly P&L that swings like that cannot tell you whether a promotion worked or a price increase stuck. Your gross-to-net waterfall handles the revenue side of margin; landed cost handles the cost side, and both have to be right before the gross margin line means anything. If you have never checked yours, the CPG gross margin reality check is a fast first pass.

How do you set up landed cost in your books?

Landed cost works when it is built once per SKU as a standard, updated on a schedule, and reconciled to actual invoices every month. Six steps:

1. Build a standard landed cost for each SKU. Use the bill of materials, the current co-packer rate, typical run size, and the average freight per unit from the last few shipments. This is the number your pricing, promotions, and forecast should use.
2. Give each cost line its own account. Ingredients, packaging, co-packer fees, inbound freight, setup fees, and 3PL receiving each get an inventory or clearing account, so you can see which line moved when margin moves.
3. Capitalize landed costs when the run is received, not when the bill is paid. Freight bills and setup invoices often arrive weeks after the product. Accrue them against the run so the cost lands in inventory in the right month.
4. Pick one allocation basis for shared costs. A mixed truckload of three SKUs needs its freight split by units, cases, weight, or pallets. Any reasonable basis works if you use the same one every time.
5. Split every 3PL invoice into its pieces. Receiving goes to inventory. Storage, pick and pack, and outbound shipping go to their own expense lines. One "3PL fees" account is where margin analysis goes to die.
6. Reconcile inventory at every location monthly. Under tolling, you own raw materials sitting at the co-packer, so its inventory report has to tie to your books, along with the 3PL on-hand report and anything in transit. The inventory number your books have to defend covers how to run that reconciliation and track the variance.

Update the standard at least quarterly, and immediately when a co-packer rate, freight lane, or packaging cost changes. A standard that is a year old is a guess with a decimal point.

Why does landed cost change your cash plan?

Landed cost changes your cash plan because every dollar in it leaves the bank before the unit sells. Under tolling, you pay for ingredients and packaging weeks before the run, pay the co-packer at or after production, then wait for the retailer to pay. Larger runs lower the unit cost and raise the cash tied up in inventory at the same time. The right run size is the one your cash can carry, which is the tradeoff at the center of the CPG cash conversion cycle.

Where Thryve fits

Thryve Accounting & Advisory in McKinney, Texas works with food and beverage and other consumer brands between $1M and $50M in revenue, including dairy, with inventory and deduction tracking built for how food brands actually make and sell product. Our CPG accounting work builds the landed cost by SKU, splits the co-packer and 3PL invoices into the right accounts, and reconciles inventory at every location as part of a monthly close. Our fractional CFO work for CPG brands turns that landed cost into pricing, run size, and cash decisions.

Thryve is not the right fit if you need someone to find or negotiate with a co-packer or 3PL; that is an operations or supply chain hire. And if your books are months behind, the foundation work comes first, because landed cost built on an unreconciled general ledger only makes a wrong number look precise.

Bring your P&L. We'll find the leak.

FAQ

Are 3PL fees part of cost of goods sold?

Some 3PL fees are part of cost of goods sold and some are not. Inbound receiving, the fee to unload and put away pallets that just arrived, is usually treated as part of landed cost because it is a step in getting the product to a sellable location, so it flows into inventory and then into COGS when the unit sells. Storage, pick and pack, outbound shipping, and account fees generally are not, because they happen after the product is ready to sell. The exact treatment depends on what each fee covers and on the accounting policy your accountant sets, so split the 3PL invoice by line and confirm the policy before you build margin reports on it.

Should freight be included in COGS for a CPG brand?

Inbound freight, the cost of moving ingredients and packaging to the co-packer and finished goods to your warehouse or 3PL, is generally part of inventory cost and reaches COGS when the product sells. Outbound freight to customers is different: many CPG brands put freight to distributors and retailers in COGS and others put it in selling expense, and both can be acceptable as long as the brand picks one treatment, applies it consistently, and discloses it. Mixing the two makes margin by customer and by month unreliable. Ask your accountant which treatment fits your reporting and your lender or investor expectations.

How often should I update my landed cost per unit?

Update the standard landed cost per unit at least quarterly, and right away whenever a co-packer rate, freight lane, packaging cost, or typical run size changes. Between updates, compare actual invoices to the standard every month and investigate any variance that moves gross margin by more than a point or so. Fast-growing brands and brands with volatile ingredient or freight costs may need monthly updates. The right cadence depends on how often your inputs change and how tight your margins are, so set it with whoever owns your monthly close.