Landed Cost Formula for Ingredients and Packaging

Landed cost is what an item costs by the time it's on your shelf: the purchase price plus freight, duty, insurance and any handling fees. The formula per unit is (purchase price + that item's share of the extra charges) ÷ units received. The share is the part people skip: when one shipment carries several items, the freight has to be split between them, by value, by weight or by quantity, and the method you pick changes each item's cost. In the example below, $560 of freight and fees on a shipment to Hawaii adds 14.7% to everything when split by value, but 8.2% to the pouches and 42.4% to the coconut oil when split by weight. Below is the formula, the three ways to split, and which to use when.

The short version

• Landed cost = purchase price + freight + duty + insurance + fees.
• Per unit = (line price + its share of the charges) ÷ units received.
• Split shared charges by value, weight or quantity, whichever matches what drove the charge.
• Freight is usually best by weight; duty and insurance by value.
• Leaving freight out understates every cost and every margin built on it.
• Shipping to an island or across the country makes this a big number, not a rounding error.
• TaroStack spreads each charge across a delivery by value, quantity or weight, as you choose. More below.

The formula

Landed cost of a line     = line price + its share of freight, duty, insurance and fees
Landed cost per unit      = landed cost of the line ÷ units received
Share of a charge         = charge × (line's value, weight or quantity ÷ the delivery's total)

A shipment, split two ways

Windward Roots, the made-up taro business I use in these examples, gets a shipment from the mainland:

On top: ocean freight and trucking $480, harbor handling $60, insurance $20, so $560 of charges.

By value    pouches $560 × 3,100 ÷ 3,820 = $454.45; oil $560 × 720 ÷ 3,820 = $105.55
By weight   pouches $560 × 250 ÷ 550 = $254.55;     oil $560 × 300 ÷ 550 = $305.45

The oil's invoice price is $2.40 a pound. Split by value, freight adds 35 cents; split by weight, it adds $1.02. Heavy, cheap goods carry more of the freight by weight, because weight is what the freight company charged for. Splitting by value would quietly make the oil look cheaper and the pouches dearer than they are. Quantity only works when every line is counted in the same unit, like cases of the same size.

Which split to use

You can split each charge differently: freight by weight, insurance by value, as long as you do it the same way every time. This is general information, not tax or accounting advice; your accountant may have a preference.

What it does downstream

The pouch's landed cost, $0.3355 by weight, is 8.2% more than the invoice's $0.31, and the oil's is 42% more. Every bag of chips carries one pouch and about 30 mL of oil, so the landed figures belong in the cost of every bag, and in the margin on every price list. How packaging cost per unit is built is in packaging cost per unit, how the costs flow into stock value under FIFO is in fifo method formula, and what that does to the year's inventory value is in what is inventory valuation.

Where this stops working

On a spreadsheet, landed cost is a calculation done once, if at all. The freight invoice arrives a week after the goods, from a different company, and by then the stock is already in the sheet at the invoice price. Splitting it means finding the delivery, working out weights and values, and updating every item's cost, so the freight usually lands in an expense account instead, and every product looks more profitable than it is.

How TaroStack does it

TaroStack puts freight, duty and other charges into the cost of the stock they came with, split the way you choose.

Charges spread across the delivery. When you receive a delivery, add its charges (freight, duty or other), and choose for each how it's spread across the lines: by value, by quantity or by weight. Each line's cost goes up by its share, so the stock lands at what it really cost. A charge billed in a different currency from the order, like a local forwarder's freight on an overseas order, can be entered in the currency it's billed in.

The landed cost flows everywhere. Stock is costed in FIFO layers or moving average, so each delivery's layer carries its own freight. Batches take ingredients at their landed cost, recipes and sub-recipes carry it into every product, and margins are reported per product on actual cost, freight included. Stock value is honest because the freight is in it.

And the trend shows. A buying-costs and price-creep report per supplier shows what each supplier's goods are costing you over time.

Receiving with landed costs, FIFO or moving average and stock value are on every plan, from $49 a month; recipes and batches that carry landed costs into products are on Standard at $99. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

What is the landed cost formula?

Landed cost = purchase price + freight + duty + insurance + fees. Per unit, divide each line's price plus its share of the charges by the units received.

How do you allocate freight to inventory?

Split the freight across the delivery's lines in proportion to what drove it: usually weight, sometimes volume or quantity. Duty and insurance are usually split by value.

Should freight be included in inventory cost?

Generally, yes: freight to get goods to you is part of what they cost, and leaving it out understates stock value and cost of goods. Ask your accountant how they want it handled.

What is an example of landed cost?

In the example, 300 lb of coconut oil invoiced at $2.40 a pound lands at $3.42 a pound once freight and fees are split by weight, because it carried more than half the shipment's weight.