Landed Cost: What's Included and How to Calculate It
By Newtown Analytics · · 7 min read
For ops, supply chain & planning leaders
Landed cost is the total cost of getting a product from the supplier to your door, ready to sell, and it is almost always higher than the price on the supplier's invoice. A product bought for $8.00 can easily cost $10 or more once freight, insurance, duties, brokerage, port fees and handling are added. Margin calculated on the supplier price alone overstates profit and can lead to prices that look healthy and lose money. This guide lists every component of landed cost, shows a per-unit calculation with checked arithmetic, compares ways of allocating shared costs such as container freight, and covers the hidden items that companies leave out. It belongs to unit economics and budgeting and forecasting, leads to the landed cost calculator and how shipping costs erode margin, and supports cost of goods sold.
What landed cost includes
| Component | What it covers | Notes |
|---|---|---|
| Product cost | Supplier's price per unit, including tooling or setup amortized per unit | Use the price in your purchase terms |
| International freight | Ocean, air or ground transport from origin | Often quoted per container, per kilogram or per cubic meter |
| Insurance | Cargo insurance in transit | Usually a small percentage of value |
| Duties and tariffs | Charged by customs on imported goods | Depends on classification, origin and valuation rules |
| Customs brokerage and fees | Broker charges, filing fees, bond costs | Often per entry, so spread across the shipment |
| Port and terminal charges | Handling at origin and destination, demurrage if containers sit | Can spike when ports are congested |
| Drayage and inland freight | Moving from the port to your warehouse | Per container or per pallet |
| Inbound handling | Unloading, receiving, inspection, labeling | Labor and warehouse cost |
| Quality and testing | Pre-shipment inspection, lab tests | Per shipment |
| Currency effect | Cost of exchanging currency, or the effect of a rate move | Matters when the supplier prices in another currency |
| Carrying cost | Cost of capital tied up while goods are in transit and in stock | Often left out, but real |
| Shrink and damage | Loss in transit and handling | Estimate from history |
Not every company pays every item. A domestic buyer of finished goods may have only freight and handling. An importer of goods from several countries may have all of them. The principle is the same: include every cost that is incurred to get the product to a sellable position.
A per-unit example
A buyer imports a product with a supplier price of $8.00 per unit (free on board, FOB, meaning the supplier delivers it to the ship at origin). The hypothetical costs per unit are:
| Item | Per unit |
|---|---|
| Supplier price (FOB) | $8.00 |
| Ocean freight | $0.90 |
| Cargo insurance | $0.05 |
| Duty at 6.5% of customs value ($8.00) | $0.52 |
| Customs brokerage and fees | $0.10 |
| Port and drayage | $0.20 |
| Inbound handling and receiving | $0.15 |
| Landed cost per unit | $9.92 |
Check: 8.00 + 0.90 + 0.05 + 0.52 + 0.10 + 0.20 + 0.15 = 9.92. The landed cost is 24 percent higher than the supplier price (1.92 / 8.00). If the selling price to a retailer is $14.00, the margin calculated on supplier cost looks like $6.00, or 42.9 percent. On landed cost, it is $4.08, or 29.1 percent (4.08 / 14.00). The 14-point gap is the margin the business would have believed it had and did not.
A note on duties: the customs value on which duty is charged depends on the rules of the importing country and on the trade terms of the purchase. Under some systems international freight and insurance are excluded from the dutiable value, and under others they are included. Duty rates depend on product classification and origin, and they change. Confirm the rate and the valuation basis with a customs broker, and refresh them whenever trade rules change.
Allocating shared costs
Some costs apply to a whole shipment, such as a container's freight, and must be spread across the products inside it. The method you choose changes the cost of each item.
A container costs $2,400 to ship. It holds two products:
| Product | Units | Weight per unit | Product value per unit | Total weight | Total value |
|---|---|---|---|---|---|
| A | 1,000 | 0.5 kg | $5.00 | 500 kg | $5,000 |
| B | 500 | 2.0 kg | $12.00 | 1,000 kg | $6,000 |
Allocation by weight: A gets 500 / 1,500 = one-third, or $800 ($0.80 per unit). B gets two-thirds, or $1,600 ($3.20 per unit).
Allocation by value: A gets 5,000 / 11,000 of $2,400, which is $1,090.91 ($1.09 per unit). B gets 6,000 / 11,000 of $2,400, or $1,309.09 ($2.62 per unit).
The difference is large for B: $3.20 against $2.62 per unit. Which is right? Freight is driven by weight and volume, not by the value of the contents, so allocation by weight or volume reflects the true cause of the cost. Allocation by value is easier but spreads cost toward expensive items that do not take up more space. For duties, allocate by value, because duty is charged on value. Use a driver-based method for each cost type: freight by weight or volume, duties by value, brokerage per entry or per line, handling per unit or per pallet.
Standard versus actual landed cost
Many companies set a standard landed cost per product for the year, based on expected freight, duty and handling, and record the difference between standard and actual as a variance. The standard is useful for pricing and for consistent margin reporting. The variance tells you where the plan was wrong, for example freight rates that rose or duty that changed. Review standards at least quarterly in volatile markets, and also whenever a major input changes. If standards are stale, margins reported to management will be wrong, and so will pricing.
Costs that companies miss
- Carrying cost. Goods in transit for six weeks and stored for another eight are tied up for 14 weeks. At an annual cost of capital of 10 percent, a unit costing $9.92 carries a financing cost of about 9.92 × 0.10 × 14 / 52 = $0.27. See demand planning and inventory optimization for how carrying cost fits into inventory decisions.
- Demurrage and detention. Fees when a container is not collected or returned on time.
- Quality failures. Goods rejected on arrival still carry their freight and duty.
- Currency moves. A supplier priced in another currency changes your cost when exchange rates move between order and payment.
- Minimum order quantities. Buying more than needed to hit a price break creates carrying cost.
- Samples and prototypes. Often charged to overhead, but they belong to the product.
- Returns to origin or rework. Rare but expensive.
How landed cost feeds decisions
Landed cost is the starting point for price, margin, supplier choice and make-or-buy decisions. When comparing suppliers, compare landed cost, not the quoted price: a supplier that is $0.50 cheaper per unit may cost more once longer lead times, higher freight and larger safety stock are included. When setting prices, build from landed cost plus the costs of selling and serving. When allocating profit by product, use landed cost so that heavy and bulky products carry their true freight. See cost of goods sold for how landed cost flows into the income statement.
Building the habit
Keep a landed cost sheet for every product with each component on its own line, a note on the source and the date it was last updated. Assign an owner for each cost type: purchasing for supplier price, logistics for freight, trade compliance for duties. Update after each shipment by comparing the actual invoices to the standard. Review the biggest variances monthly. A simple sheet kept current is worth more than a sophisticated system built on stale data.
Common mistakes
- Using supplier price as cost.
- Allocating freight by value when weight drives it.
- Leaving out duties, brokerage or port charges.
- Not updating standards.
- Ignoring the carrying cost of long lead times.
- Comparing suppliers on price only.
FAQs
What is landed cost?
The total cost of a product delivered to your location and ready for sale, including the supplier price, freight, insurance, duties, fees and handling.
How do you calculate landed cost per unit?
Add all costs from the supplier's price through receiving, then divide shared costs across units by a sensible driver such as weight, volume or value.
What is the difference between FOB and landed cost?
FOB is the price at the point where the supplier hands goods to the carrier. Landed cost adds everything after that point until the goods are in your warehouse.
How should I allocate container freight across products?
By the driver of the cost, usually weight or volume. Allocate duties by value.
How often should I update landed cost?
At least quarterly, and any time freight rates, duty rates, exchange rates or supplier prices change significantly.
Keep reading
This article is for general information. It is not accounting, tax, legal or investment advice, and examples use illustrative numbers rather than client data. Confirm decisions that carry financial or legal consequences with a qualified professional.