What Is Landed Cost? Formula, Components & a Worked Example
Landed cost is what a unit actually cost by the time it reached your shelf — supplier price plus freight, duty, insurance, handling, and currency movement. The formula, the components, and a worked example.
Landed cost is the total cost of a product by the time it arrives at your warehouse, ready to sell or use: the supplier's price plus every cost incurred getting it there — freight, insurance, customs duty and import taxes, clearing and port charges, inland transport, and handling. It is the number that margin should be computed on. Any price set against the bare supplier invoice is set against a fiction.
The formula
Landed cost =
Supplier price (FOB/CIF) + international freight & insurance + customs duty & non-recoverable import taxes + clearing, port & documentation fees + inland transport & handling ± currency adjustment — allocated to the units in the shipment.
The components, and where each hides
| Component | Typical share of supplier price | Where it goes missing |
|---|---|---|
| International freight & insurance | 5–15% by mode and density | Bundled into CIF prices and never seen separately |
| Customs duty & levies | 0–35%+ by product classification | Counted, usually — but recoverable VAT wrongly included or excluded |
| Clearing agent, port & docs | 2–5% | Paid in cash at the port, expensed as "clearing", never lands on the goods |
| Inland transport & handling | 1–4% | Booked to a general transport account instead of the shipment |
| Currency movement | Whatever happened between order and payment | Costed at the quote-date rate instead of the payment-date rate |
| Storage & demurrage | Zero in a good month; brutal in a bad one | Written off as a loss instead of costed to the goods (policy decision either way — make it consciously) |
A worked example
You import 1,000 units at $10.00 each — a $10,000 supplier invoice. Sea freight and insurance: $1,200. Duty and non-recoverable import charges: $2,300. Clearing, port, and documentation: $450. Truck from port to warehouse: $350. Total landed: $14,300, or $14.30 per unit — 43% above the invoice price. A "40% margin" priced off the $10.00 invoice is actually a 2% loss before any operating cost. Multiply that misreading across a catalog and a business can grow itself into insolvency, best-sellers first.
Allocation: spreading shared costs across the shipment
- By value — for ad-valorem costs (clearing fees, agency): each item takes a share proportional to its invoice value.
- By weight or volume — for freight: the dense, heavy items carry more of the container than the light ones. Value-allocating freight quietly subsidizes exactly the bulky items that deserve a premium.
- Directly — duty computes per line from the customs entry; assign it per item, don't average it.
- Pick the basis per cost type, write it down, and apply it identically per shipment — consistency is what makes landed costs comparable over time.
Doing it in a system instead of a spreadsheet
The mechanics are simple; the discipline is relentless — every shipment, every cost document, allocated before the stock sells. That is why landed costing belongs at receiving in the purchasing system: costs attach to the shipment, allocation runs by rule, and unit costs update before pricing decisions happen. For the import-heavy version with duties, clearing agents, and exchange swings in full flight, see the landed costs deep-dive — and for how the number flows into production costing, the manufacturing guide.
Price from the real number
AWRA allocates freight, duty, and clearing at receiving and carries true landed cost into margins, recipes, and pricing.
See landed costing in AWRAFrequently asked questions
Is landed cost the same as cost of goods sold (COGS)?
Related, not identical. Landed cost is the per-unit acquisition cost at arrival; COGS is the expense recognized when units sell, computed from landed costs via your valuation method (FIFO, weighted average). Get landed cost wrong and COGS inherits the error.
Should recoverable VAT be in landed cost?
No — if you can claim it as input tax it is a cash-flow item, not a cost. Non-recoverable taxes and duties do belong in the cost. If you are not VAT-registered, import VAT is a real cost and lands on the goods. Confirm treatment with your accountant.
How do we handle landed cost when final charges arrive weeks after the goods?
Receive at estimated landed cost so the stock is sellable, then post the true-up as a cost adjustment when the final clearing invoice lands. The estimate-versus-final gap per shipment is itself a useful report — chronically bad estimates mean a component is being forgotten.
Does landed cost matter for domestic purchases?
Yes, at smaller scale: delivery charges, fuel surcharges, and handling on local purchases are landed costs too. The import version is just the dramatic case — the principle is identical: every cost of getting goods to usable state belongs on the goods.
