Landed Cost
Landed cost is the total expense of a product, including its purchase price, shipping, insurance, duties, and other fees, until it arrives at the buyer's facility.
Landed cost represents the true total cost of a purchased product. It goes beyond the simple vendor price on a purchase order. The calculation includes all expenses incurred to get an item from the supplier's door to your warehouse. These costs typically cover freight, customs duties, tariffs, taxes, insurance, currency conversion, and handling fees.
Understanding landed cost is critical for accurate financial planning and profitability analysis. A low unit price from an overseas supplier may seem attractive. However, high shipping and import fees can make the final landed cost higher than a domestic alternative. By calculating landed cost, manufacturers can make better sourcing decisions, determine accurate pricing for their own finished goods, and manage their supply chain more effectively.
To implement landed cost tracking, manufacturers collect data from multiple documents. These include the commercial invoice, bill of lading, freight invoices, and customs brokerage statements. This information is then entered into an Enterprise Resource Planning (ERP) or accounting system. The system allocates these various costs to the specific inventory items received, providing a precise cost per unit.
A metal fabricator in Ohio buys 500 steel brackets from a supplier in Germany for €10 each (€5,000 total). The international freight costs $800, insurance is $150, and U.S. customs duties are $350. The total landed cost is $5,000 (product) + $800 (freight) + $150 (insurance) + $350 (duties), which equals $6,300, making the landed cost per bracket $12.60.
Why is landed cost different from the purchase price?
The purchase price is only the cost of the item itself. Landed cost includes all additional expenses required to transport that item to your location, like shipping and taxes.
How does landed cost affect my product pricing?
Landed cost determines your true cost of goods sold (COGS). You must set your sales price above the landed cost to ensure each sale is profitable.
What are some common hidden costs in landed cost calculations?
Commonly overlooked costs include currency conversion fees, port charges, payment processing fees, and costs for quality inspections at the source.
How often should I calculate landed cost?
Calculate landed cost for every international shipment. Freight rates, duties, and currency exchange rates can change frequently, affecting your total cost.
Can software help calculate landed cost?
Yes, ERP and supply chain management systems can automate the calculation. They pull data from purchase orders, shipping documents, and invoices to allocate costs accurately.
Cost of Goods Sold
COGSCost of Goods Sold (COGS) represents the direct costs of producing the goods sold by a business.
Supply Chain Management
SCMSupply Chain Management (SCM) is the process of managing the flow of goods, data, and finances related to a product from procurement to final delivery.
Purchase Order
POA purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services.
Bill of Lading
BOLA Bill of Lading (BOL) is a required legal document between a shipper and a carrier that details the goods being shipped.
Economic Order Quantity
EOQEconomic Order Quantity (EOQ) is the ideal order size a company should purchase to minimize its total inventory costs, including holding and ordering costs.