Perhaps the most important thing to account for in a product-based business is landed cost. It’s also the one thing business owners struggle with the most. When importing products for your business or simply trying to better understand the total cost of what you’re buying, it’s essential to know how to calculate the landed cost of those products. Having a good understanding of the landed costs will enable you to predict your profitability margins. Not only do you have to calculate the landed cost, but you also need to account for it in your accounting system. This can be a complex calculation, but with guidance, you should be able to figure out the total cost of your purchase fast and easily.
So what is “landed cost”, and how can you calculate it? Keep reading for all the details.
What is Landed Cost?
Landed cost is the total cost for a product delivered to your doorstep (landed at your warehouse). This includes the cost of the product, shipping, duties, taxes, brokerage fees, and any other cost incurred in purchasing and getting the product into your possession.
What is the Purpose of Landed Cost?
The purpose of landed cost is to accurately determine the true cost of the products you’re selling. This information is especially important for companies that produce or import products from overseas locations. Knowing your landed cost will prevent you from selling your product at a loss. For example, you may pay a factory $10.00 for an item and think this is your cost for the product. But you also have to pay a tariff of $2.50, shipping, and brokerage fees of $4.50. By the time the product is landed at your location, the total cost is $17.00. If you’re selling the product for $20.00, the actual profit is only $3.00. Now if you have advertising and other costs in selling the product that exceeds $3.00 you’re actually losing money on each sale.
By including all direct and indirect costs of a product, it helps you to set prices that are competitive with other companies’ products while still being profitable.
Why is Landed Cost so Important?
Without knowing your landed costs, you cannot determine if you’re profitable. Furthermore, without landed costs, you cannot determine the profitability of each product. In accrual-based accounting, having accurate landed costs in your accounting system will allow you to determine if you’re profitable. Accrual-based accounting accounts for the cost of a product when it’s sold. To determine the profitability of a product when it’s sold, the landed cost is subtracted from the sale price to determine the gross profit for the product.
What Does Landed Cost Include?
Landed cost includes the cost of your product and all the expenses incurred to get it to your warehouse. It includes:
- Product Cost
- Ocean Transport Charges
- Air Transport Charges
- Customs Brokerage Fees
- Customs Exam Charges
- Truck Delivery Charges (local freight)
- Chassis Rental
- Drayage Charges
- Importer Security Filing Fee
- Customs Bond (single entry)
- Exchange Rates
- Demurrage Fees
- Port Charges
Don’t worry too much about identifying and tracking all these charges. Your freight forwarder will typically provide you with a single invoice containing all the charges for shipping your product.
How to Calculate Landed Cost
To calculate the landed cost for a product you need to know the cost of the product, Brokerage fees and duties, shipping costs, and incidentals such as insurance or storage. Here are several steps you can follow to calculate the landed cost of an item:
Step 1: Determine the unit cost of the product.
The first step is determining the unit cost of the products. The unit cost of a product is the price per unit that the supplier charges you. This is usually fairly simple if you’re ordering from a domestic supplier. Nonetheless, if you’re importing from overseas, you must first calculate the exchange rate and convert it to your local currency.
Step 2: Add in any Customs duties and Brokerage Fees.
To import products, you may have to pay a Broker along with Customs duties. When importing products a broker will arrange shipping, and file the necessary paperwork with Customs to import the product. Typically there are duties imposed on products. The duties you have to pay will depend on the country you’re importing from and the product you’re importing.
Step 3: Calculate the shipping and freight costs.
The third step is calculating the cost of shipping your product to you. The shipping cost can vary depending on how much product you buy, how far away it originates from, and what carrier you use, so it’s best to check with your vendor before calculating this number.
Step 4: Account for any other costs.
There might be other costs that you have to account for as well. These costs are not included in the unit cost of the product, but you have to account for them. These costs may include warehousing, packaging, and insurance.
Step 5: Calculate your final number.
Now that you have all the information needed to calculate landed cost, you can put it all together in one simple equation:
Landed Cost = Unit cost of product + Shipping + Customs + Risk + Overhead
One thing to consider: If you’re shipping multiple items in a single container, you’ll need to decide how to allocate the shipping charges to the products. You may apply shipping costs by weight if you’re shipping heavy items. However, you may divide the shipping costs by volume if you’re shipping heavy and bulky items. It is recommended that you determine whether weight or volume limits how much you put into a shipping container, then use this as your basis to apply the shipping costs to the products.
For example, say you’re shipping various types of gravel, and the shipping container is limited to 45,000 lbs. The gravel will likely only fill half the volume before reaching the weight limit. Since you’re limited by weight, the best approach is to divide the shipping cost by weight and apply it in the appropriate amount to each type of gravel.
Alternatively, if you’re shipping various items of furniture, you’re likely to reach the volume limit of the shipping container long before the weight limit. In this instance, you want to distribute the shipping charges based on volume. This way, a sofa will have a higher shipping charge applied than an end chair, as it should.
Landed Cost Example
Here is an example of shipping a 20’ container that contains two products. To keep things simple, under the Shipping Cost, we include all the charges from the broker (ocean freight, Customs filing, local trucking, chassis charge, etc.). For Duties and Customs fees, we include what we pay to the CBP (U.S. Customs and Border Protection).
We will distribute the shipping and duties fee based on the weight of the products as these are heavy products and don’t fill the volume of the container (the amount we can ship in a container is restricted by weight, not by volume). Since Product B is twice the weight of Product A, 2/3 of the shipping/duties will be applied to Product B. The remaining 1/3 will be applied to Product A.
Shipping Cost (20’ container): $4,000.00 Duties and Customs Fees: $8,000.00 Total Shipping and Duties: $12,000.00 Product A Weight: 10,000 lbs. Product B Weight: 20,000 lbs. Total Weight: 30,000 lbs. Product A Cost: $13,000.00 Product B Cost: $25,000.00 Total Cost: $38,000.00 Shipping & Duties - $/lb.: $0.40 / lb. Landed Costs: Product A Shipping & Duties: $0.40 x 10,000 = $4,000.00 Landed Cost: $13,000.00 + $4,000.00 = $17,000.00 Product B Shipping & Duties: $0.40 x 20,000 = $8,000.00 Landed Cost: $25,000.00 + $8,000.00 = $33,000.00
Tips for Minimizing Landed Cost
To ensure you are getting the best deal for your products and services, here are a few tips to help minimize your landed cost.
1. Negotiate with suppliers.
Feel free to negotiate with suppliers as they offer volume discounts for bulk purchases, as they often have wiggle room that can lead to lower landed costs for you. Additionally, working with a reputable supplier with experience handling international deliveries is key to ensuring landed costs are manageable and predictable.
2. Choose a suitable shipping method.
Not all shipping methods are created equal; some will cost more than others. Researching various carriers and weighing the benefits of different delivery speeds can help you find the most cost-effective option.
3. Utilize bulk shipments.
Purchasing in bulk and shipping it all at once saves money on transportation costs. Especially if you can ship by the full container load.
4. Prioritize efficient packaging solutions.
Investing in an efficient packaging solution that optimizes container space utilization will reduce landed costs by increasing the number of items you can fit into a single shipping container.
5. Monitor currency exchange rates.
Depending on where you source your products, currency exchange rates can significantly affect landed costs since they affect the overall cost of importing goods into your country or region.
6. Analyze tariff and duty costs.
Tariffs and duties can have a significant impact on landed costs, so be sure to do your research on these fees beforehand. Understanding your product and how to properly categorize it will help you to avoid paying unnecessary high duties.
7. Take advantage of tax benefits.
Countries offer different tax benefits to companies importing products, so research what incentives may be available in the region where you’re sourcing your product.
By following these tips, you can reduce landed costs and increase the overall profitability of your business.
Wrapping it Up
You must understand how to calculate landed costs if you want to operate a profitable business. This little-known metric can significantly impact your pricing decisions and help you stay competitive while still being profitable. While the calculation process may seem daunting initially, it’s not too complicated once you’ve done it a few times.
So what are you waiting for? Start calculating your landed cost and including it in your accounting system. You’ll soon see how this valuable information can benefit your business and your profitability.