What is landed cost?

Definition

Landed cost is the invoice price plus the extra charges that get the goods to your floor, ready to sell or use. On the books, this total is what you record as inventory, an asset, until those goods leave.

A bicycle shop that pays $400 for a frame and $60 of ocean freight and duty holds $460 on the shelf. The $60 rides with the bike, not as a period shipping expense, if the bike is still unsold.

Cash-basis books may feel the whole outlay when the vendor and the freight carrier are paid. Accrual books raise the asset when the goods and the related bills arrive, even if cash has not moved.

This figure is the ready-to-use unit cost. It is not the sticker on the supplier's invoice alone.

Where it shows up

Balance Sheet: Located in the inventory section until the goods are sold.

P&L: Related to the full product cost that later becomes cost of goods sold.

Cash flow: Increases in inventory, reported cash from operating activities decreases.

See also: Cost Of Goods Sold · Inventory Valuation · Direct Materials

When you look at your Balance Sheet, this cost sits inside the inventory grouping. Finished bikes wait as finished goods inventory; parts still in the crate sit with the rest of the stock.

When the inventory balance is high, cash is often sitting in bikes and the freight that brought them. When it is low, the shop may be ordering closer to need, or it may be short a popular size.

The Income Statement does not list this cost as a standing line while the bikes are unsold. The related expense shows up as cost of goods sold only when a bike sells.

On the Statement of Cash Flows, paying the vendor and the freight carrier is the cash event. Cash from operating activities falls when you pay, and inventory rises until those bikes sell.

How it works

The shop orders the bikes and later receives a supplier invoice for the frames. The invoice price is only the starting number.

Freight, duty, insurance, and broker fees that belong to this shipment get added to the same units. Those extras ride with the bikes until a customer takes one.

If the freight bill is still open, accounts payable rises with it. The extra dollars still go into inventory, not into a shipping expense, while the goods sit on the floor.

Inventory valuation then uses this fuller unit cost when a bike sells. The method you pick starts from the dollars you actually put on the unit.

Stay with the charges that get the item to your door. A later store display, an assembly wage, or a shop repair after arrival is usually a different cost.

Direct materials for a builder follow the same idea. The steel or the parts include the freight that brought them in, not just the mill's invoice.

Keep the packing list, the freight invoice, and the duty notice with the receiving ticket. Anyone tying a bike to its cost should see every charge that rode with that crate.

Do not treat the freight invoice as a period expense if the bikes are still unsold. The freight is part of the asset until the sale.

After a bike sells, those dollars leave inventory with the rest of the unit cost. They do not stay in a permanent freight-in account of their own.

Example

A bicycle shop receives a crate of city bikes. The frames cost $4,000, and the freight and duty to the dock add $400.

The receipt is recorded:

Debit: Inventory $4,400

Credit: Accounts payable $4,400

Inventory rises by $4,400, and payable rises by the same amount. Cash has not moved, and the Income Statement has not changed yet.

The $4,400 is the landed amount for that crate. Each bike now carries its share of freight, not just the supplier's unit price.

If one bike that holds $440 of that cost sells, $440 leaves inventory as cost of goods sold. The leftover bikes still sit at the landed amount.

Common mix-ups

This figure is not the supplier's invoice alone. Freight, duty, and similar in-bound charges belong with the goods if they were needed to get the crate to your door.

This figure is not a shipping expense on the P&L while the goods are unsold. Those extra dollars are inventory until a customer takes the item.

This figure is not the same as a purchase price variance. A variance is the gap versus a standard; this number is the full in-door cost itself.

Related terms

• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Direct Materials: Materials that can be traced directly to a finished product.
• Inventory Valuation: The method used to assign cost to units held and units sold.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.
• Vendor Bill: The invoice a supplier sends that becomes a payable.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Raw Materials Inventory: Purchased materials waiting to enter production.
• Purchase Price Variance: The difference between what you paid for materials and the standard price.