Understanding Landed Costs
Landed costs represent the real cost of acquiring inventory. When you buy goods, the price you pay the supplier is often just one part of the total expense.
What are Landed Costs?
Think of landed costs as the "total bill" for getting a product to your warehouse shelf. It includes:
- 🚢 Freight & Shipping: Transporting goods from the supplier.
- 🏛️ Customs & Duties: Government taxes on imported items.
- 🛡️ Insurance: Coverage for goods while in transit.
- 📦 Handling: Port fees, loading/unloading, and warehouse processing.
Why does this matter? Without landed costs, you might think a product costs $10 when it actually costs $12. This leads to:
- Understated Costs: Your financial reports show lower expenses than reality.
- Overstated Profits: You think you're making more money than you are.
- Bad Pricing: You might set your selling price too low to cover your true costs.
Accounting Impact
Accounting standards (like IFRS and GAAP) require you to capitalize these costs. Instead of recording shipping as an immediate expense, it is added to the value of the inventory asset.
Without Landed Costs (Incorrect)
- Inventory Value: $1,000 (Purchase price only)
- Shipping Expense: $200 (Recorded immediately as a loss)
- Total Asset: $1,000
With Landed Costs (Correct)
- Inventory Value: $1,200 (Purchase price + Shipping)
- Shipping Expense: $0 (The cost is stored in the asset until the item is sold)
- Total Asset: $1,200
When you finally sell the product, the full $12 cost moves to Cost of Goods Sold (COGS), giving you an accurate profit calculation.
Impact on Profitability
Consider a smartphone sold for $350:
| Metric | Without Landed Costs | With Landed Costs |
|---|---|---|
| Sale Price | $350.00 | $350.00 |
| COGS (Cost) | $200.00 | $220.88 |
| Gross Profit | $150.00 | $129.12 |
| Margin | 42.9% | 36.9% |
The 6% difference in margin is critical for business decision-making.