In this article
Talk to our experts- Landed cost
- Landed cost is the total cost of acquiring a product. It adds every expense incurred in acquiring the item to its purchase price, usually freight, insurance, import duties and other charges that arise between the manufacturer and the retailer, to establish what the goods actually cost. As a form of cost price, it is a key factor in determining profitability.
How it works
The landed cost formula for one shipment:
- Product cost paid to the supplier
- plus freight
- plus insurance
- plus import duties
- plus other charges that arise between the manufacturer and you
- equals total landed cost
Per unit = total landed cost / units received.
Shipping costs, customs duties and other fees often aren't known when the purchase order is created, so the full landed cost often isn't known at ordering. To reach a per-unit figure, a charge billed once for a whole shipment, such as a single freight invoice, has to be divided across the units in it.
For US federal tax, IRS Publication 334 counts freight-in on merchandise you purchase for sale as part of cost of goods sold. A margin built on the supplier price alone overstates gross profit per unit whenever there are added costs.
Example
A distributor buys 1,000 units at $8.00 each, so product cost is $8,000. Freight is $600, insurance is $40, and an assumed 5% duty on the goods adds $400. Total landed cost is $8,000 + $600 + $40 + $400 = $9,040, or $9,040 / 1,000 = $9.04 per unit. Sold at $12.00, each unit earns $2.96 of gross profit, not the $4.00 the supplier price suggests.
Landed cost vs FOB price
FOB (free on board) is an Incoterms term used only in sea freight, always named with a port of loading. Under "FOB port", the seller pays to get the goods to the port of shipment, plus loading costs. The buyer pays marine freight, insurance, unloading and transport from the arrival port to the final destination. Landed cost counts all expenses incurred in acquiring the item, usually freight, insurance, import duties and other charges, to establish what the goods actually cost. In North American domestic shipping, FOB also describes the point at which a seller is no longer responsible for shipping costs.
Landed cost and inventory value
For US federal tax, the cost method in IRS Publication 538 says that to properly value your inventory at cost, you must include all direct and indirect costs associated with it. For merchandise purchased during the year, cost means the invoice price minus appropriate discounts plus transportation or other charges incurred in acquiring the goods. Discounts work two ways:
- Trade discount. Allowed regardless of when payment is made, generally for volume or quantity purchases. It must reduce the cost of inventory.
- Cash discount. A reduction for paying within a prescribed time period. A business can deduct cash discounts or include them in income, but must treat them consistently from year to year.
On Shopify
In Shopify, the purchase order records the commercial agreement, and the linked inventory transfer handles shipments, receiving and cost adjustments. Shipping costs, customs duties and other fees often aren't known when you create a purchase order, so you can add them as cost adjustments to individual shipments on the linked inventory transfer. The Cost summary on the transfer aggregates all shipment adjustments, so you can compare the agreed cost on the purchase order with the actual cost to receive the goods. You can also add a cost per item to products to track your business operating costs and profits. Where a business needs shipment-level charges spread across individual units, or unit costs kept in step with the ERP, that work typically runs in the ERP, an app or a custom integration.
How Uncap helps
For distributors, Uncap Connect is a native, embedded, two-way sync between Shopify and your ERP, built for B2B from the ground up, so inventory, pricing, customer terms and fulfillment updates flow back to the storefront. See Shopify for distributors.
Sources
Frequently asked questions
What is landed cost in supply chain?
It is the full cost of acquiring an item: the purchase price plus expenses such as freight, insurance and import duties that arise between the manufacturer and the retailer.
What is COGS vs landed cost?
Landed cost is what an item actually cost to acquire. Cost of goods sold is the cost of the goods you sold, which a business that makes or buys goods to sell deducts from gross receipts, and for US federal tax the IRS counts freight-in on merchandise purchased for sale as part of it.
What is a landed cost price?
It is the landed cost per unit: total landed cost for a shipment divided by the units received. Pricing from it keeps freight and duties inside the margin math.
