Tariffs Are Changing Your Inventory Costs. Is Your Accounting Keeping Up?

Published on October 20, 2026 by Jessica Doremus in Manufacturing, Wholesale / Distribution

Article Summary

• Tariff costs are still shifting. Canada’s September 8 retaliatory tariffs and subsequent U.S. tariff changes effective September 15 have added another layer of complexity for manufacturers and distributors sourcing or selling internationally.
• Tariffs aren’t just a pricing challenge. Tariffs incurred when acquiring inventory generally must be capitalized into inventory costs rather than immediately expensed.
• Your costing methodology matters. Without accurate tariff tracking, manufacturers and distributors risk relying on incomplete product-level profitability data.
• Inventory valuation deserves a closer look. Rising import costs can increase the risk of inventory write-downs, while potential tariff refunds introduce additional financial reporting considerations.
• A proactive approach can make a big difference. Reviewing inventory costing methods, ERP capabilities, and allocation practices now can help you maintain reliable financial reporting as trade policies continue to evolve.

A tariff increase at the border can become a margin surprise months later.

For manufacturers and wholesale distributors, changing trade policies have made it increasingly difficult to predict the true cost of materials, components, and finished goods. And while tariff announcements tend to focus on trade relationships and supply chains, there’s another important consideration that deserves attention: how those costs move through your inventory and financial statements.

The latest U.S.-Canada tariff developments illustrate the challenge. In September 2026, both countries implemented changes affecting hundreds of manufactured products and materials. For businesses importing these goods, the resulting costs can significantly influence inventory valuations, cost of goods sold, and profitability.

The question is whether your accounting systems are keeping pace with those changes, and whether the financial information you’re using to make business decisions reflects the full picture.

What’s changed with tariffs?

September brought several significant changes to the U.S.-Canada trade relationship, with implications for manufacturers and distributors on both sides of the border.

On September 8, Canada implemented retaliatory tariffs of 15%, 25%, and 50% on 648 tariff classifications of U.S.-origin products, affecting approximately $27.6 billion in imports. The affected categories include steel and aluminum products, agricultural equipment, appliances, electronics, and other manufactured goods. Tariffs on certain steel and aluminum products increased from 25% to 50%, while others remain subject to different rates.

The United States subsequently expanded and modified its tariffs on certain Canadian imports, effective September 15. These changes included adjustments to covered product categories and, in certain circumstances, the application of Section 338 tariffs in addition to existing Section 232 duties.

For American manufacturers and distributors, it’s important to distinguish between the two countries’ measures:

• U.S. import tariffs can directly increase the acquisition costs of Canadian materials, components, and finished goods purchased by American businesses.
• Canadian retaliatory tariffs apply to specified U.S.-origin goods entering Canada, potentially affecting American exporters’ competitiveness, customer pricing, and demand.

With tariff rates and product classifications continuing to change, businesses need to understand not only which duties apply, but how those duties are reflected in their financial reporting.

Why are tariffs an inventory accounting issue?

When a tariff increases an imported product’s cost, that additional amount doesn’t necessarily hit your income statement immediately.

Under U.S. Generally Accepted Accounting Principles (GAAP), tariffs incurred when acquiring inventory generally must be capitalized as part of inventory cost under Accounting Standards Codification (ASC) 330. They ordinarily flow into cost of goods sold when the related inventory is sold, rather than being expensed when the duty is paid.

For example, a manufacturer importing components in September may pay substantially higher duties than earlier in the year. If those components remain in inventory at quarter-end, their tariff costs generally remain on the balance sheet until the associated products are sold, subject to inventory valuation rules.

That timing matters. Gross margins may not immediately show the impact of higher duties, and the effect can emerge over multiple reporting periods. If your system misassigns tariffs across products, product-level margins may be overstated or understated, making it harder to see which products, customers, or contracts are profitable.

Who should be paying attention?

• Manufacturers and distributors sourcing internationally. Companies importing materials, components, or finished goods need to capture applicable duties in inventory costs. Even established supplier relationships may require revised costing assumptions when classifications or rates change.
• Businesses using standard costing or older ERP systems. Item-level tariff tracing provides detailed visibility, but not every system supports it easily. Standard cost updates and systematic allocations can work, provided assumptions and variances are monitored regularly.
• Businesses relying on product margins for pricing. Broadly distributing tariff costs can make highly exposed products appear more profitable than they are, while making less-exposed products appear less profitable. That can distort pricing and sourcing decisions.
• Companies passing costs to customers. Tariff-related price increases may help protect margins, but contractual terms matter. Adjustments could involve variable consideration or contract modifications under ASC 606, depending on the arrangement.

Three approaches to tracking tariff costs in inventory

The right costing process depends on inventory mix, sourcing exposure, transaction volume, accounting policies, and system capabilities.

1. Direct capitalization: Tariff costs are assigned to the specific inventory items or purchases that generated them. This provides detailed product-level visibility and can be especially useful when duty exposure varies significantly among products. However, it requires systems capable of tracking duties at the item or purchase level.
2. Standard costing adjustments: Businesses using standard costing incorporate applicable tariffs into established product costs and refresh those standards as conditions change. This can be practical for manufacturers with large inventories or complex production processes, but standard costs must reasonably approximate actual costs, with related variances evaluated and appropriately accounted for. Volatile duties may require more frequent updates.
3. Systematic cost allocation: When direct tracing isn’t practical, tariff costs may be assigned to affected inventory using a reasonable, consistent allocation basis, such as customs value or another relevant cost driver. Broad allocations can reduce product-level accuracy, so review the methodology regularly.

None of these is universally “right.” The right approach depends on your product mix, your sourcing exposure, and what your ERP system can actually support. What matters is that the choice is made deliberately – and revisited as tariff rates keep shifting – rather than left to however the system happened to be configured before tariffs became material.

Ultimately, the goal is to establish a process that supports both GAAP-compliant financial statements and dependable product-level financial information.

What should manufacturers and distributors do now?

A useful starting point is to assess whether your costing process answers five questions:

1. Are we capturing the full cost of imported inventory? Confirm that applicable tariffs and other acquisition costs are reflected consistently.
2. How often are our costs and allocations updated? Revisit standards when duty rates, suppliers, or sourcing patterns change.
3. Can we identify exposure by product or product line? Make sure reporting supports meaningful pricing and profitability decisions.
4. Are we testing inventory recoverability? Consider whether higher costs or market changes create write-down risks.
5. Are we tracking potential refunds? Monitor eligible recoveries and evaluate their accounting treatment.

Turning tariff uncertainty into better financial insight

Tariff policies may be outside your control, but the quality of your financial information doesn’t have to be. Whether you’re changing suppliers, revisiting prices, or preparing for year-end reporting, understanding your true inventory costs helps you make confident decisions.

Our Fractional Accounting and Advisory Services team helps manufacturers and distributors evaluate inventory costing methodologies, assess ERP capabilities, improve product-level margin reporting, and build processes that can adapt as rates change.

Are your inventory costs telling you the full story? Contact our team to discuss how we can help you gain greater confidence in your numbers.

Related Resources

For more perspective, read The Hidden Balance Sheet Impact: How Tariffs Are Reshaping Financial Reporting. You can also compare your company’s performance with industry peers using our free Manufacturing & Wholesale Distribution Benchmarking Report. And as always, if you have any questions, let us know, and we’ll help you find the answers.