How Should Manufacturers Track Tariff Costs?

Tariffs are back in the headlines—and back in the budgets. For manufacturers and distributors sourcing goods overseas, the rising cost of imported materials, parts, and components due to tariffs poses a financial and operational challenge. These costs don’t just hit the bottom line—they also raise important questions about how companies track and reflect tariffs in their cost accounting systems.

Many companies rely on standard costing methods to estimate the costs of materials and components that go into their finished products. This simplifies planning, budgeting, and performance analysis. However, we’ve learned all too well that tariffs are anything but standard. They fluctuate based on geopolitical dynamics and trade policy, introducing variability into a system built for stability.

So, what’s the right approach for handling tariff costs? What’s right for one manufacturer isn’t necessarily the best route for all manufacturers, so it’s important to understand that you’ve got options.

One option is to revise standard costs to incorporate expected tariff levels. This approach keeps product costs closer to economic reality and can improve pricing accuracy. However, updating standards frequently can be labor-intensive and may undermine the stability that standard costing is meant to provide. This approach also assumes that tariff rates will remain in effect for a predictable period—which is not always the case.

Another strategy is to account for tariffs as a purchase price variance (PPV). This keeps the base standard intact while isolating the tariff impact in a separate bucket for analysis. Finance leaders may appreciate the transparency this method offers, as it allows them to track and report tariff-related expenses separately. But this can make it harder for operations or sales teams to understand the "true" cost of goods, potentially affecting margin decisions.

A third approach involves establishing a new cost category specifically for tariffs within the inventory or job costing system. This provides clarity, avoids distorting standard costs, and makes it easier to track the financial impact over time. However, implementing this solution requires both accounting judgment and systems capability—which brings us to another key consideration.

Companies that carry inventory know that the tax rules for valuing that inventory can differ substantially from the rules for financial reporting. These are known as the Uniform Capitalization rules, and they require the inclusion of a broad array of direct and indirect cost in the valuation of inventory. This has the effect of delaying the deductibility of these costs until the inventory is sold. Companies will need to take care to include the costs of tariffs in inventory for tax reporting purposes, irrespective of how they are treated for financial reporting.

Not all enterprise resource planning (ERP) or job costing systems are equipped to handle granular cost tracking without customization. Companies should assess whether their existing systems can accommodate a new cost field or tariff variance tracking. This is where engaging a partner like CSC Tech Activation can add value.

With the right support, businesses can tailor their systems to reflect the real-world complexities of global sourcing—without losing control over cost reporting.

One of the biggest questions manufacturers face today is: Am I doing this right? Industry benchmarking can help. Whether through peer roundtables, industry associations or your CSH accounting advisors, gaining visibility into how others are handling tariff cost tracking can uncover best practices—and help companies stay competitive in pricing, profitability, and compliance.

Interested in learning how CSH can help you navigate these waters? Connect with us today.