Landed Cost: Definition, calculation & benefits

landed costThe ability to source products from around the world offers businesses opportunities to reduce costs and increase product availability, potentially resulting in strategic and profitability gains.  However, the opportunity also brings the challenge of accurately calculating true cost and profitability analysis.

Landed cost is the process of capturing all costs associated with the acquisition of goods, enabling businesses to accurately calculate inventory valuation by including these associated costs, whether the costs are known at the time of receipt of the goods, or sometime after.

Landed cost: Definition & calculation

Product cost

=

Total Landed Cost

+ Shipping
+ Customs
+ Risk
+ Overhead

 

To calculate the landed cost, or true cost, of a product, associated costs are added to the cost of the product, including:

  • Shipping: Costs associated with crating, packing, handling, and freight.
  • Customs: Duties, taxes, tariffs, VAT, brokers fees, harbor fees
  • Risk: Insurance, compliance, quality, safety stock costs
  • Overhead: Purchasing staff, due diligence cost, travel, exchange rates

Landed cost: Importance in decision making

Nearly everyone uses a version of landed costing in their daily lives.  Let’s say you need a new refrigerator; you will probably do a bit of shopping around before you make your purchase.  The one from the big box store 40 miles away may be $50 less than the one from the appliance store down the street, but when you add in the delivery charge of $100, it may end up being cheaper to buy the higher priced one that is nearby with free delivery.

So, one would assume businesses, when sourcing a product from potential manufacturers or distributors from around the world, would compare the true or total landed cost prior to making purchasing decisions.  Without understanding of the total landed cost, it is nearly impossible to make informed decisions on product sourcing and profitability.

Yet, according to the 2010 Third Party Logistics Study, only 45% of the respondents stated they used total landed cost extensively.  Reasons cited as to why total landed cost was not used included necessary data not available (49%), did not have the right tools (48%), did not have sufficient time for analysis (31%) and not sure how to apply landed cost (27%).

Landed cost with ACCTivate!

Award-winning ACCTivate! is packed with Inventory Management capabilities, including the most robust landed cost capabilities available to small and mid-sized businesses.  ACCTivate!’s landed cost can include additional costs associated with the acquired goods such as duties, taxes, VAT, government fees, freight and insurance in product valuation, whether the costs are known at the time of receipt of the goods, or sometime after.

In addition to powerful inventory management capabilities, ACCTivate! includes Customer Satisfaction tools &  Business Management features, enabling businesses to automate, organize and easily make better business management decisions for a sustainable, competitive advantage.

Learn more today!

Contact us or give us a call at 1-866-877-1311 to speak with an inventory specialist.