Landing Cost Calculation
Landed
Cost Formula (Calculation)
How
do I calculate my true cost (“landed cost”) of products? This is a question we
frequently hear, and it’s based mainly on three areas of uncertainty:
- What costs should I take into account?
- What if I only get the true costs on invoices
long after the shipment arrives?
- How do I apportion these costs across multiple
items on the same shipment (and deal with currency exchange rates)?
Although
proper landed cost tracking software will be able to do the
calculations for you, let’s take a quick look at each of the above questions,
and try to demystify the Landed Cost Formula.
1.
What costs should I take into account?
Beyond
the obvious – the price I’m paying the supplier of the products I’m purchasing
– the basic rule of thumb is to include all costs directly incurred in getting
those purchased products into your warehouse. This would typically include, at
a minimum, freight costs. For imported products, there’s often duty and
brokerage costs. Others include insurance, storage costs, purchasing agency
commissions and other regulatory fees.
2.
What if I only get the true costs on invoices long after the shipment arrives?
With
factors like freight, that’s often the case. In order to calculate a true
landed cost at the time you receive a shipment, you’d have to use estimates for
many of the non-supplier costs. For so many business reasons, it’s critical
that you have a very clear idea of likely costs before you incur them.
With the right processes in place, a business should have no real
problems coming up with estimates that are very close to the actual costs. The
key is to then have a good process for reconciling the actual bills (when they
arrive) against the estimates you’ve used – something that a good ERP Inventory
Accounting Software system should facilitate.
To
learn more about ERP Inventory and Accounting software, download our Free Software
Buying Guide.
3.
How do I apportion these costs across multiple items on the same shipment?
The
best approach to apportion a cost factor over multiple different products on
the same shipment is to use the calculation method that most closely mirrors
the way that cost is constructed. For example, duty is usually very simple, as
it’s a straight percentage of the value – so that’s how you’ll apply it, using
the appropriate percentage(s). Freight would typically be pro-rated based on
either weight or cube, depending on how the carrier charges for transportation.
And it is of course important to factor in currency exchange rates, because
it’s not uncommon for importers to be incurring costs in two or more
currencies. For currency conversion, assuming you have not hedged currencies,
the guidelines say to use the exchange rate on the date of receipt of the
goods.
Example
of a Landed Cost Formula:
Information
for 100 Widgets received as part of a shipment:
- Supplier cost: $25 per unit
- Duty applicable at 2%
- Freight cost for the entire shipment was $1,200 –
and the widgets represent one quarter of the shipment by cube
In
this case the formula for each unit would be:
$25 + (2% X $25) + (($1,200 X 25%) / 100) = $28.50
In
order to automate the process for landed cost tracking, consider looking for an
inventory management and accounting ERP system that includes landed cost
tracking functionality.
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