Inventory and stock

Landed cost formula: meaning and worked example

Definition

Landed cost: Landed cost is the full cost of getting goods to your godown: the purchase price after discount, plus freight, loading, insurance, duties and other charges.

Also called: landed cost formula, landing cost, landed price, cost of purchase

What landed cost includes

The price on the supplier's invoice is rarely the whole cost of stock. Landed cost adds everything you pay to get the goods onto your shelf. Ind AS 2, the Indian accounting standard on inventories, describes the costs of purchase as the purchase price, import duties and other taxes that cannot be recovered, and transport, handling and other costs directly linked to buying the goods, less trade discounts and rebates.

Purchase price, after trade discounts.
Freight and transport to your godown.
Loading, unloading and packing charges.
Insurance while the goods are in transit.
Customs duty and other taxes you cannot claim back, for imports.
Not GST you claim as input tax credit: you get it back, so it is not a cost. GST you cannot claim is part of the cost.

Landed cost formula

Landed cost per unit = (purchase value after discount + freight + other charges + duties you cannot recover) ÷ units received.

When one delivery carries several products, share the charges between them. Sharing by value is the most common method: each line takes the same share of the charges as its share of the order value. Sharing by weight or volume suits heavy, cheap goods, where freight follows size rather than price.

Why landed cost matters

Pricing from the invoice price alone overstates your margin. Small orders carry far more freight per unit than large ones, so a reorder that looks cheaper can cost more once it lands. Using landed cost for stock value and margins shows which suppliers and order sizes really pay. Recalculate it when freight rates change, as they often do around festival season and the monsoon.

Worked example

Landed cost for a garment store's order from Tiruppur

A store orders 200 T-shirts at ₹180 and 100 track pants at ₹320 from a Tiruppur supplier, a goods value of ₹36,000 + ₹32,000 = ₹68,000. Freight is ₹3,000 and loading ₹400, so ₹3,400 in all before GST. Shared by value, the T-shirts take ₹36,000 ÷ ₹68,000 × ₹3,400 = ₹1,800 and the track pants ₹1,600. Landed cost per T-shirt = (₹36,000 + ₹1,800) ÷ 200 = ₹189, and per pair of track pants = (₹32,000 + ₹1,600) ÷ 100 = ₹336.

In managemate

In managemate, add named extra costs, such as freight or loading, to a purchase order, each with its own tax rate. Their amounts before tax are spread across the order's lines by value and added to each line's price after discount and before GST, converted at the order's exchange rate for foreign-currency orders, to give the landed cost of each unit received. Stock value, margins and the cost of goods sold use that cost, and charges edited after the goods arrive revalue the stock still held from the order. Extra costs are added to the order's total, which you owe that supplier, so they suit charges the supplier bills you for. A transporter's separate bill can be recorded as an expense, but it is not spread into stock cost.