Landed Cost Explained for Retailers (With a Worked Example)

What is landed cost?

Landed cost is the cost of a product delivered to where you will sell it. It matters because your cost of goods sold, your gross margin and the value of stock on your balance sheet all start from the unit cost you record at receipt.

This is not only good management practice. The IRS tells businesses that for merchandise purchased during the year, cost means "the invoice price minus appropriate discounts plus transportation or other charges incurred in acquiring the goods". The international standard for inventories, IAS 2, says the cost of inventories includes "all costs of purchase … and other costs incurred in bringing the inventories to their present location and condition".

What goes into landed cost (and what doesn't)?

A useful rule: if the cost was needed to get the goods to your store in a sellable state, it belongs in landed cost. If it was spent after the goods arrived, or to sell them, it doesn't.

How do you calculate landed cost per unit?

For a shipment containing a single product the arithmetic is simple:

Real shipments are rarely one product. The hard part is deciding how much of the freight and duty each product should carry. That is what an allocation method decides.

Should you split landed cost by value or by quantity?

Take one shipment with two products. Product A is a cheap, fast-moving item; Product B is expensive and sells in smaller numbers. The shipment carries $1,200 of extra costs: $600 freight, $400 duty and $200 clearance and handling.

By value fits costs that follow value, like duty and insurance, and shipments where products are similar in size. By quantity fits costs that follow units, like handling per carton, and shipments of similar products at different prices. Some businesses split freight by weight or volume and duty by value. Whatever you choose, apply the same rule to every shipment so that margins are comparable month to month.

Why does landed cost change your margins so much?

Say Product A sells for $3.20. Here is its gross margin under each cost basis:

The same product looks healthy, ordinary or barely worth stocking depending on which cost you believe. A retailer pricing from the invoice would think it earns 37.5% on Product A, when the real figure is somewhere between 6% and 23%. That gap is where "we're busy but not making money" comes from.

What if the freight bill arrives after the goods?

It usually does. Record the extra cost against the original receipt as soon as it arrives, so it lands on the units it belongs to. The units still in stock then carry the higher cost. Units already sold before the bill arrived were costed without it, so on shipments with large extra costs it pays to estimate them at receipt and correct the difference later.

Two more places landed cost shows up: transfers between your own stores (moving stock costs money too; see how to transfer stock between stores), and supplier bills in another currency, where the exchange rate you record decides the cost in your own currency.

How does Momentum handle landed cost?

In Momentum by Ltiora, you add freight, duty and other charges to a purchase receipt and Momentum spreads them across the lines by value or by quantity. The landed cost becomes the unit cost of the stock received, which then flows through whichever costing method you use (FIFO, LIFO or weighted average) into cost of goods sold and your double-entry books. A Landed Cost report shows what each receipt really cost.

Transfers between locations can be priced at landed cost, supplier bills can be recorded in another currency at the exchange rate you set, and people without permission to see cost don't see it on the till. If you want the margin effect in one place, the Margin by Location and Sales Margin reports use the landed figure, not the invoice.

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