What Is Landed Cost & How Do You Calculate It?

Post on Tuesday, June 26th, 2018 in Accounting

In the simplest sense, landed cost refers to the total cost of a product after it arrives at a buyer’s door.

As a rule, the landed cost includes the following fees and costs:

  • initial price of the product
  • shipping and handling
  • pre-shipment inspection
  • customs duties
  • taxes
  • insurance
  • storage
  • procurement agency commissions
  • currency conversions

As you can see, a product “collects” a lot of fees on its way to the buyer, especially over a long-distance journey. Correct calculation of these fees can be the key to success for your business.

In this article, we will define landed cost in more detail, explain how to calculate landed cost, and talk about the importance of total landed cost.

Accuracy Is Everything For Landed Cost

The most challenging part of finding the total landed cost of a product is being accurate.

This is important for a bunch of reasons, but the primary one is setting the price of your product. You need to know the cost as well as all the associated costs before you can even think about selling it. Including landed costs in a sales price to vendors also makes the price seem more transparent and reasonable.

This figure is hard to nail down exactly, as the landed price depends on a wide range of factors such as product category, shipping distance, weight and size of the package, and so on. When calculating landed cost, you need to carefully gather all possible data to get the most accurate figures. It is crucial to be proactive and start with the basics, and then add more details during the process.

Let’s take a closer look at each possible fee that a total landed cost may include.

Shipping and Handling Fees

These fees depend on volume, departure port, destination, season, shipping company, and so on. Shipping fees can vary from $1 to hundreds of dollars based on these factors.

The fees include the following:

  • Current shipping rates provided by USPS, UPS, FedEx, or other carriers.
  • Surcharge rates, such as delivery area surcharges, fuel surcharges, delivery confirmation fees, etc.
  • Warehouse costs = (monthly warehouse labor cost + shipping supplies expense + facility cost) / average monthly shipping volume.
  • Per order costs based on shipment weight.

Pre-Shipment Inspection Costs

Pre-shipment inspection (PSI) is a compliance check of a random unit of a product from each batch before the product is shipped. PSI audit is typically carried out by third party inspection authorities. Inspection costs can vary from $300 to $600 depending on country, sample size for audit, time required to check, etc. There are no strict rules on where to inspect products, so it is possible to decrease the resulting landed price by ordering the audit in the country of the product’s origin.

Import Customs Duties

If you ship your products internationally, your landed costs will include import customs duties. A customs duty is a tax based on the value that customs puts on your goods. The duty amount depends exclusively on the customs authority decision.

Almost all countries have three levels of duties for origin countries. For example, duty rates for imports to the US depend on trade relations with origin countries. Duty percentages for countries that have normal trade relations with the US are typically lower than 10%. However, for countries that do not have frequent trade relations with the US, the duty percentage can reach 90% in some cases. At the same time some countries, such as Australia, Canada, Israel, Singapore, etc. have duty free trade relations with the US, so there is no need to include customs duty in your landed cost.

When estimating the duty amount for your products, it is important to know the following information:

  • HS code (Harmonized Commodity Description and Coding System) – Customs officers use this code to locate a specific item, find out which category it belongs to, and define a specific import duty based on this category. An HS code is typically a 6- to 10-digit code that the supplier specifies on a commercial invoice.
  • Declared value for customs – This is the value of a shipment as declared by its shipper. This acts as the basis for the duties and taxes calculations. As with HS code, the declared value can also be found on a commercial invoice.

Taxes

Taxes are typically charged as a percentage of the customs value of cost of goods + shipping + insurance + customs duty.

Value added tax (VAT) is the most common type of import tax. A VAT is a form of consumption tax. From the buyer’s perspective, it is a tax on the purchase price. From the seller’s perspective, it is a tax only on the value that is added to a product, material, or service, from an accounting point of view. There is no VAT fee for US importers. As for EU member countries, VAT rates can vary depending on the country. China has a fixed VAT rate of 20%, for example 

Another type of tax is sales tax that is charged by authorities for selling specific goods and services. Sales tax is a common type of tax for the US. In most cases, it is charged by federal government, but some states, such as California, also charge extra sales tax.

Shipping Insurance

Shipping insurance is a service that may reimburse senders in case their packages are lost, stolen, and/or damaged during shipping. For example, if you sell fragile goods such as vases, then insurance is a must. In the US, insurance is typically offered by carriers such as USPS, UPS, and FedEx. When analyzing your total landed costs, you need to carefully study insurance costs offered by carriers, or consider self-insurance as an option.

Storage Fees

During its journey, shipments may be subject to waiting periods in ports until customs authorities approve them. All ports around the world give specific time windows, which are typically from 3 to 7 days. All import requirements should be addressed during this period. However, if there are delays, you will have to pay extra charges. Therefore, you should find out beforehand whether your goods are likely to be delayed at the port and whether it is advisable to add  storage costs to your expected landed costs.

Purchasing Agency Commissions

Purchasing agencies are companies that offer to buy goods on behalf of another party. They manage all the stages of a sales process and handle documentation such as purchase orders and invoices. The fees that they charge depend on the country, and typically consist of an upfront fee and purchase price percentage. This is typically agreed to before any transactions take place.

Use Landed Cost To Help Your Organization

You can’t plan the future of your business without knowing the landed cost of your products. In fact, it should be integrated into your inventory management system so that you not only know how much the physical product costs, but also how much it costs to move it. It helps you more accurately calculate margins. You can get a better idea of your true inventory carrying costs.

So how to calculate landed cost? You need to carefully analyze all of the fees specified above and add them up. It may be a long and tough process if done manually, but specialized inventory and order management software will help you streamline it.

Try a free demo and see how Dynamic Inventory can help you with this.

Adam is the Assistant Director of Operations at Dynamic Inventory. He has experience working with retailers in various industries including sporting goods, automotive parts, outdoor equipment, and more. His background is in e-commerce internet marketing and he has helped design the requirements for many features in Dynamic Inventory based on his expertise managing and marketing products online.

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