Getting Tariff Costs Right in Inventory Accounting

Tariffs have become a growing concern for manufacturing, distribution, and construction companies, steadily driving up the cost of imported raw materials, components, and finished goods. For financial leaders in these sectors, this isn’t just a budgeting issue but a strategic one, as properly accounting for these added costs is crucial to protecting margins, setting informed pricing strategies, and providing stakeholders with a clear and reliable view of financial performance.

Understanding Tariffs—and How They Impact Inventory Accounting

While the word “tariff” seems commonplace nowadays, many still don’t fully understand what it means—or how it directly affects business operations, particularly inventory accounting. Tariffs are government-imposed taxes on imported goods, typically calculated as a percentage of an item’s declared value. For companies importing raw materials, components, or finished products, these charges become part of the total cost of acquiring inventory—and they can significantly affect how that inventory is valued.

To understand how tariffs should be treated, it's helpful to first understand what governs inventory accounting in the U.S. financial system. GAAP, or Generally Accepted Accounting Principles, is the standardized framework that companies follow to promote consistency and transparency in financial reporting. Developed by the Financial Accounting Standards Board (FASB), GAAP outlines which costs must be included in inventory.

Under GAAP, inventory must reflect all costs necessary to bring goods to their current condition and location. This includes the purchase price, freight-in, handling charges, import duties—and, importantly, tariffs. These costs must be capitalized as part of the inventory and recognized through the cost of goods sold when the inventory is sold rather than being expensed immediately. For manufacturers and construction firms alike, capitalized tariff costs typically enter the balance sheet as part of raw materials or work-in-process inventory, then move to cost of goods sold as inventory is consumed or projects progress.

This treatment, outlined in FASB ASC 330, ensures accurate margin reporting and financial statement integrity. Misclassifying tariffs can lead to distorted financials, audit concerns, and missed insights into product profitability. Proper capitalization, on the other hand, supports better business decisions and compliance.

In practice, this accounting treatment has real financial implications—especially in construction and prefabrication environments. For a commercial general contractor importing steel beams or finish hardware, a 10% tariff can erase bid margins if not captured in project estimates. Likewise, prefab component manufacturers now fold tariff costs into work-in-process and job cost ledgers to avoid margin surprises and align costs with revenue recognition.

Operational Considerations for Financial Leaders

Managing the accounting side of tariffs is only part of the equation. You also need to turn those insights into operational decisions that support your long-term strategy. When tariffs are misclassified, your financial statements can start to tell the wrong story—inventory balances become unreliable, margins lose clarity, and the numbers you present to stakeholders may no longer reflect operational reality. Capitalizing tariff costs corrects this distortion by matching total acquisition costs with revenue when the inventory is sold, whereas expensing them upfront may inflate a single period’s expenses and can raise red flags with auditors or your board.

To keep both your reporting and day-to-day operations in sync, focus on four practical steps:

• Strengthen your systems: Your inventory and ERP platforms (enterprise resource planning systems that integrate functions like inventory, accounting, and procurement) should track tariff costs in granular detail. This often means tighter coordination with customs brokers and procurement teams, so the right data is captured at the right time.
• Promote cross-functional collaboration: Bring accounting, operations, and supply-chain teams together to pinpoint tariff-affected products and update costing models. Consistent communication keeps everyone on the same page.
• Reevaluate sourcing and pricing: Some companies are shifting to domestic suppliers to curb long-term exposure, while others use tariff data to refine pricing and protect margins. Knowing exactly where costs are rising—and why—helps you make smarter, more transparent pricing decisions.
• Build flexibility into forecasting: Trade policies change fast. Equip your forecasting tools to model multiple scenarios so you’re ready for best- and worst-case outcomes before they hit the bottom line.

Passing Tariff Costs Along Strategically

Once tariff costs are accurately captured in inventory, the next challenge is determining how to reflect them in customer pricing. While protecting margins is important, doing so without damaging customer relationships requires a thoughtful approach. The following strategies can help you manage tariff-related pricing adjustments in a way that maintains both financial stability and customer trust.

• Introduce targeted surcharges: Instead of blanket price increases, some companies apply temporary surcharges tied directly to tariff-affected goods. This helps isolate cost increases without reshaping the entire pricing structure.
• Use contractual cost-sharing mechanisms: Others incorporate contract language that activates shared tariff costs when rates exceed certain thresholds. This approach provides flexibility and builds in responsiveness to policy shifts.
• Frame pricing as part of a shared challenge: When customers understand that tariffs are part of broader economic pressures—not just internal decisions—they’re more likely to respond with understanding. Clear, transparent communication goes a long way toward preserving trust and long-term partnerships.

Don’t Let Tariff Costs Catch You Off Guard

Tariffs are more than a line item—they’re a material cost that must be accurately accounted for in inventory. If your organization is facing uncertainty around tariff accounting, now is the time to act. Contact your CRI advisor for support in keeping your reporting accurate, compliant, and positioned for what’s next. Our team understands the pressures facing manufacturing, distribution, and construction companies and provides the technical expertise, system guidance, and strategic insight you need to move forward with confidence.