Landed cost: how to calculate it and book it
Landed cost is what an item really cost you once it is on your shelf: the price you paid the supplier plus the cost of getting it to you. This guide covers what to include, how to split shared charges over a shipment, and how to book it so your stock value and gross margin are right.
What goes into landed cost
Add every cost you pay to bring the goods to the place you sell them from:
- The purchase price on the supplier's invoice, after any discount
- Freight by sea, air or road to your warehouse
- Insurance on the goods while they travel
- Import duty and other customs charges
- Import VAT or GST, but only if you cannot claim it back
- Fees to get the goods released and delivered, such as port handling or a customs broker's fee
Non-recoverable import VAT or GST
Leave out tax you can reclaim and costs that come after the goods arrive: import VAT or GST you claim back on your tax return, storage once the goods are in stock, the cost of selling and delivering to your customers, and interest on money borrowed to pay for them. Those are expenses of the period, not part of the cost of the stock. Which taxes you can reclaim depends on your country's rules, so check with your accountant.
The formula
Landed cost per unit = (purchase cost of the line + its share of the charges) ÷ quantity
How to split shared charges over a shipment
A freight or duty charge usually covers a whole shipment, so you need a rule for sharing it over the items in it. There are three common ones:
- By value. Each line takes a share in proportion to what it cost. This is the usual choice, and it matches how duty and insurance are charged, since both are worked out on value.
- By quantity. Each unit takes the same amount. It is simple and fair when the items are similar in size and price, but it loads cheap items with too much of the cost.
- By weight or volume. Suits freight on heavy or bulky goods, because carriers price by weight or space. You need the weight or volume of every line.
Worked example
One supplier bill: 10 bottles of olive oil at 20.00 and 30 tins of tomatoes at 10.00, plus 50.00 of sea freight and 25.00 of import duty. The goods cost 500.00 and the charges 75.00. Split by value, the oil carries 40% of each charge and the tomatoes 60%.
| Line | Goods | Freight | Duty | Landed cost | Per unit |
|---|---|---|---|---|---|
| Olive oil, 10 bottles | 200.00 | 20.00 | 10.00 | 230.00 | 23.00 |
| Tomatoes, 30 tins | 300.00 | 30.00 | 15.00 | 345.00 | 11.50 |
| Total | 500.00 | 50.00 | 25.00 | 575.00 |
Split by quantity instead, each of the 40 units takes 1.875 (1.25 of freight and 0.625 of duty). The oil would land at 21.875 a bottle and the tomatoes at 11.875 a tin, so the cheaper tins would carry more duty than their value attracted.
Rounding
Shares are rounded to the cent, and the rounded shares must still add up to the charge. If 100.00 of freight is split over three lines of equal value, two lines take 33.33 and one takes 33.34. The usual rule, the largest remainder method, gives each spare cent to the line whose share lost the most in rounding.
Booking landed cost in the accounts
Charges often arrive on a different day from the goods. A clearing account holds each charge until the goods it belongs to are received. Anything left on a clearing account is a charge still waiting for its goods, so it is easy to spot.
1. The supplier's bill
The goods go to inventory and each charge to its own clearing account. You owe the supplier the whole bill.
| Account | Debit | Credit |
|---|---|---|
| Inventory | 500.00 | |
| Freight clearing | 50.00 | |
| Import duty clearing | 25.00 | |
| Accounts payable | 575.00 |
2. Receiving the goods
All 10 bottles of oil arrive, but only 20 of the 30 tins. The goods received take their share of the charges out of clearing and into inventory: the oil all of its 30.00, the tins two thirds of their 45.00.
| Account | Debit | Credit |
|---|---|---|
| Inventory | 60.00 | |
| Freight clearing | 40.00 | |
| Import duty clearing | 20.00 |
10.00 of freight and 5.00 of duty stay on clearing for the 10 tins not received yet. The oil is now in stock at 23.00 a bottle and the tins at 11.50 each.
3. Selling
You sell 5 bottles of oil at 35.00. The cost that leaves inventory is the landed cost, 5 × 23.00 = 115.00, so the gross margin is 60.00, not the 75.00 you would see with the freight and duty left out.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 175.00 | |
| Sales | 175.00 | |
| Cost of goods sold | 115.00 | |
| Inventory | 115.00 |
Partial receipts, late charges and returns
- Partial receipts. Each delivery takes the share of the charges that belongs to the units it brings in. The rest stays on clearing until the remaining goods arrive.
- Charges booked late. If a charge is booked after some of the goods have been sold, the share for the goods already sold goes to cost of goods sold, and only the share for the goods still in stock goes to inventory.
- Returns to the supplier. Goods you send back leave inventory at their landed cost, so the cost per unit of the stock you keep does not change.
Charges in a foreign currency
When you buy in your supplier's currency, convert the goods and the charges on the bill at the bill's exchange rate, then split them. Converting and rounding can leave a cent over; put it on the goods, so the clearing accounts empty to exactly zero. If the rate has moved by the time you pay, the difference is an exchange gain or loss, not part of the cost of the stock.
When the forwarder sends its own invoice
Freight, duty or a broker's fee often comes on a separate invoice from a freight forwarder or customs broker rather than on the supplier's bill. The accounting is the same: book it to the clearing account, then move each shipment's share into the cost of the goods it covers, and into cost of goods sold for any of those goods already sold.
Landed cost in Celerp
Celerp makes the split and the entries above for the charges on the supplier's bill. Add the freight, insurance or duty to the bill as lines for an item of the Freight type.
- The charges are spread over the bill's stock lines by value. A stock line with no value on the bill takes no share, whatever its quantity.
- The shares are rounded to the cent in your currency and add up exactly to each charge.
- Until the goods arrive, the charges wait on a clearing account. Each receipt moves its share into inventory.
- When you invoice a sale, cost of goods sold includes the landed cost.
- A bill in your supplier's currency is converted at the bill's rate.
Celerp spreads only the charges on the supplier's own bill. A separate invoice from a freight forwarder or customs broker is not spread onto the goods.