What is Landed Cost?

The price on a supplier's invoice is rarely the full cost of a product. Landed cost adds everything it takes to bring goods to your warehouse or store in saleable condition.

Components

• Purchase price
• Freight and shipping to your location, including fuel surcharges
• Customs duties and import fees
• Customs broker fees
• Insurance in transit
• Handling and port charges

Why it matters

Inventory and cost of goods sold should include these costs. The IRS explains in Publication 334 that inventory cost includes the invoice price plus transportation and other charges incurred in acquiring the goods. If freight-in and duties are expensed separately in a shipping account, gross margin looks better than it is and inventory is understated.

Example

An importer buys 1,000 units at $8 each, pays $1,200 freight, $640 in duties and $160 in broker fees. Landed cost is $10,000, or $10 per unit, not $8. Pricing based on $8 would overstate margin.

Allocating shared costs

When one shipment contains several products, allocate freight and duties by a reasonable basis such as value, weight or volume, and use the same basis consistently.

In the books

Record freight-in, duties and broker fees to inventory, or to a cost of goods sold account for freight-in if you use a periodic system. Keep shipping to customers in a separate selling expense account. Reconcile import documents to supplier invoices so duties are not missed.

See inventory accounting basics, our ecommerce bookkeeping page and FIFO and LIFO.

Related terms

• Cost of Goods Sold: Cost of goods sold is the direct cost of the products a business sold during a period.
• FIFO and LIFO: FIFO and LIFO are inventory costing methods that decide which purchase costs are assigned to the goods you sold.

Browse more definitions in the small business glossary.