Landed cost, freight terms and Incoterms

Any ERP

ExplanationIntermediate10 min read

In short. Landed cost is the supplier price plus everything it took to get the goods onto your shelf: freight, duty, brokerage, insurance and fees. How you spread those costs across items, and when you book them, decides whether your margin reports tell the truth.

Written for Finance and operations, leaders, administrators.

The price on a supplier invoice is rarely what an item costs you. Freight, duty, brokerage, insurance and handling fees all land on the same goods. If they sit in an overhead account instead of in item cost, every margin report overstates profit on the items that are expensive to bring in.

What landed cost includes

Landed cost is the full cost of getting an item to the place you stock or sell it. The usual components:

Component	What it is	Typical basis
Supplier price	The price on the purchase order or invoice, net of discounts	Per unit
Inbound freight	Carrier charges from the supplier to your dock, including fuel and accessorial charges	Per shipment
Duty	Tax on imported goods, set by tariff classification and country of origin	Percentage of customs value, sometimes per unit or weight
Brokerage	The customs broker's fee for filing the entry	Per entry
Insurance	Cover for loss or damage in transit	Per shipment or percentage of value
Other fees	Port, terminal, drayage, inspection and government processing fees	Per shipment or per entry

Landed cost per unit

(Supplier price × units + freight + duty + brokerage + insurance + fees) ÷ units

Where:

Units are the units received on the shipment, in your stocking unit of measure.
Duty is the duty actually assessed, which for most US imports is a rate applied to the customs value (see the duty section below).

Some companies also load internal costs such as receiving labor or warehouse overhead into item cost. That is a policy choice for your accountant. Here we stick to costs you pay to outside parties for a specific shipment, because those are the ones that differ sharply between items.

Trying the numbers

The calculator applies duty to the supplier price only, adds freight and the other charges as shipment totals and divides by units. With its default inputs (invented numbers): 2,000 units at $7.50 is $15,000 of goods, duty at 3.4% is $510 and adding $1,850 of freight and $420 of brokerage, fees and insurance gives a total landed cost of $17,780. That is $8.89 per unit, an uplift of 18.5% over the supplier price.

Calculator

Landed cost per unit

Duty is applied here to the supplier price only. How duty is actually assessed depends on the customs valuation rules for your shipment.

Applying duty to the supplier price alone matches the usual US starting point. CBP describes the price actually paid or payable as excluding international freight, insurance and other C.I.F. charges. Real customs value can include additions such as assists, packing or royalties, so treat this as an estimate and use the duty on your actual entry for costing.

Spreading freight across lines

One freight bill usually covers many items. To get a per-item landed cost, you allocate the shared charge across the receipt lines using some measure of how much each line "caused" the cost.

Method	Share of freight for a line	Fits when
By value	Line extended cost ÷ total extended cost	Charges that scale with value, such as insurance and ad valorem duty; mixed freight when you have no better data
By weight	Line weight ÷ total weight	LTL and parcel freight on dense goods, where weight drives the rate
By volume	Line cubic volume ÷ total cubic volume	Light, bulky goods and full containers, where space runs out before weight
By quantity	Line units ÷ total units	Lines of similar items, or when you have no weight or volume data

A worked example

The numbers below are invented. One inbound shipment carries three lines, and the freight bill is $1,200.

Line	Units	Unit price	Extended cost	Weight (lb)	Volume (cu ft)
A	100	$20.00	$2,000	500	16
B	50	$80.00	$4,000	100	4
C	250	$8.00	$2,000	400	20
Total	400		$8,000	1,000	40

The next table shows how the $1,200 lands on each line under each method, with the freight per unit in parentheses.

Line	By value	By weight	By volume	By quantity
A	25%: $300 ($3.00)	50%: $600 ($6.00)	40%: $480 ($4.80)	25%: $300 ($3.00)
B	50%: $600 ($12.00)	10%: $120 ($2.40)	10%: $120 ($2.40)	12.5%: $150 ($3.00)
C	25%: $300 ($1.20)	40%: $480 ($1.92)	50%: $600 ($2.40)	62.5%: $750 ($3.00)
Total	$1,200	$1,200	$1,200	$1,200

Every method spends the whole $1,200, but the per-unit freight on line B ranges from $2.40 to $12.00. The method you pick decides which items look profitable.

Choosing a method

Match the method to what drives the charge. Freight carriers price on weight, space or both, so weight or volume is usually closer to the truth for freight, while insurance and duty follow value. Many companies allocate each charge type by its own driver: freight by weight, insurance by value, brokerage by line or by value.

Whatever you choose, apply it consistently and write it down. Switching methods between periods moves margin between items with no change in the business.

Why landed cost changes margin reporting

Take line C from the example and say you sell it at $10.00. On supplier price alone the item costs $8.00, a 20% gross margin. Add freight allocated by weight ($1.92) and the landed cost is $9.92, so the margin falls to 0.8%. Allocated by value ($1.20), the landed cost is $9.20 and the margin is 8%.

When inbound freight goes to an overhead expense account instead of item cost, three things happen:

Item and customer margins are overstated for heavy, bulky or imported goods, and understated by comparison for light, local ones.
Pricing built on cost-plus rules sells the expensive-to-bring-in items too cheaply.
Inventory value on the balance sheet is understated, which also flatters inventory turns and GMROI.

Under US GAAP, inventory cost generally includes the costs of bringing goods to their existing condition and location, which is why freight-in usually belongs in inventory rather than in period expense. Confirm the treatment with your accountant.

When costs arrive after receipt

Freight bills, broker invoices and duty statements often arrive days or weeks after the goods are received, and sometimes after some of them have been sold. There are two common approaches.

Approach	How it works	Trade-off
Accrue at receipt	Add an estimated freight and duty charge to item cost when you receive, and book a matching accrued liability. When the real bill arrives, clear the accrual and post the difference	Item cost is close to right from day one. Needs a reasonable estimate, such as a rate per pound or a percentage of value by supplier or lane
Re-cost on arrival	Receive at supplier price, then add the charge to cost when the bill is matched to the receipt	Simple, but margins on anything sold in the gap are overstated

Either way, part of the late charge may relate to units you have already sold. That share can no longer go into inventory, so it goes to cost of goods sold or a variance account instead. The size of that share depends on how fast the item turns and how late the bill is. Track the variance between estimated and actual charges by supplier and carrier. A variance that always runs in one direction means the estimate needs fixing.

Who pays freight and who owns goods in transit

Freight terms on a purchase order answer two separate questions. One is who bears the risk of loss while the goods are moving. The other is who pays the carrier and how the bill flows.

FOB origin and FOB destination

In US domestic trade, "FOB" terms come from the Uniform Commercial Code. Under UCC 2-319, when the term is FOB the place of shipment, the seller's obligation is to put the goods in the carrier's possession, and risk passes to the buyer there. When the term is FOB the place of destination, the seller must get the goods to that place at its own expense and risk.

Term	Risk in transit	Goods in transit usually counted in	Damage claim is filed by
FOB origin (shipping point)	Buyer	Buyer's inventory	Buyer
FOB destination	Seller	Seller's inventory	Seller

Contracts can shift these defaults, and title can be separated from risk by agreement. Read the terms on the actual purchase order and supplier acknowledgement.

Freight payment terms

Payment terms for freight are independent of FOB point:

Term	Who pays the carrier	Who ends up bearing the cost
Prepaid	Seller	Seller, built into the price
Collect	Buyer, directly to the carrier	Buyer
Prepaid and add	Seller pays the carrier	Buyer, as a freight line added to the supplier invoice

A combination such as "FOB origin, freight prepaid and add" is common. Under it, the buyer owns the goods and their risk from the dock, and the seller arranges and pays the carrier and bills the buyer. For landed cost, the practical question is where the freight charge appears. Collect freight arrives on a separate carrier bill, while prepaid and add arrives on the supplier invoice, and both must reach item cost.

Incoterms 2020 at a glance

For international sales, contracts usually name one of the Incoterms rules published by the International Chamber of Commerce (ICC). Each is a three-letter code followed by a named place, such as "FCA Shanghai" or "DAP Houston". The table paraphrases, in one line each, who arranges the main carriage and where risk passes to the buyer.

Rule	Name	Main carriage arranged by	Risk passes to buyer
EXW	Ex Works	Buyer	When goods are made available at the seller's premises, not loaded
FCA	Free Carrier	Buyer	When goods are handed to the buyer's carrier at the named place
CPT	Carriage Paid To	Seller	When goods are handed to the first carrier, even though the seller pays to the destination
CIP	Carriage and Insurance Paid To	Seller, who also buys insurance	When goods are handed to the first carrier
DAP	Delivered at Place	Seller	When goods arrive at the named destination, ready for unloading
DPU	Delivered at Place Unloaded	Seller	When goods are unloaded at the named destination
DDP	Delivered Duty Paid	Seller, who also clears import and pays duty	When goods arrive at the named destination, cleared for import
FAS	Free Alongside Ship	Buyer	When goods are placed alongside the vessel at the port of shipment
FOB	Free on Board	Buyer	When goods are on board the vessel at the port of shipment
CFR	Cost and Freight	Seller	When goods are on board the vessel at the port of shipment
CIF	Cost, Insurance and Freight	Seller, who also buys insurance	When goods are on board the vessel at the port of shipment

Three points trip people up:

In the C rules, cost and risk split at different places. The seller pays freight to the destination, but the buyer carries the risk from the origin.
FAS, FOB, CFR and CIF are for sea and inland waterway transport. For containerized freight, the ICC points to FCA, CPT or CIP instead.
Incoterms FOB and UCC FOB mean different things. An Incoterms FOB refers to loading on a vessel, while a domestic "FOB origin" refers to handing the goods to any carrier. Say which one a contract means.

For landed cost, the rule tells you which charges will appear on the supplier invoice and which you must pay separately. Under EXW or FCA you pay nearly all freight, insurance, brokerage and duty yourself. Under DDP almost everything is in the supplier price.

US duty basics

Duty on goods imported into the United States starts with classification in the Harmonized Tariff Schedule (HTS), which the U.S. International Trade Commission publishes at hts.usitc.gov. Each HTS number carries a duty rate, and the rate that applies can depend on the country of origin and any trade program or additional tariff measure in force.

Most rates are ad valorem, a percentage of customs value. CBP names transaction value as the preferred basis of appraisement. Broadly, that is the price actually paid or payable for the goods when sold for export to the United States, plus certain additions. It excludes international freight, insurance and other C.I.F. charges, so the calculator on this page applies duty to the supplier price and leaves freight out. Some rates are specific (an amount per unit or weight) or compound, so check the rate type before modeling.

CBP makes the final determination of classification and value. For certainty on a specific product, importers can ask CBP for a binding ruling.

Putting landed cost into practice

List every charge type you pay on inbound goods, and find where each one is booked today. Anything in an overhead account is missing from item cost.
Pick an allocation driver per charge type, such as freight by weight and insurance by value, and write the rule down.
Decide between accrual and re-costing based on how late your bills arrive and how fast your items turn.
Check the terms on your top suppliers' purchase orders so you know which charges are in their prices and which will arrive separately.
Compare item margins before and after loading the charges. The items that move the most are the ones to re-price first.