Landed cost combines the purchase price of goods with the relevant costs of bringing them to their intended location and condition. It may include freight, duties, cargo insurance and handling. Identify what the supplier price already includes and which charges arrive separately before calculating a per-unit amount.
For a buyer comparing suppliers or updating item economics, the aim is a consistent acquisition-cost comparison. An operational estimate is not automatically the final inventory valuation: finance determines which costs qualify under the applicable accounting policy.
Landed-cost formula
Shipment cost pool = goods purchase cost + eligible additional acquisition costs
Item landed unit cost = (item purchase cost + allocated additional costs)
/ corresponding item quantity
Use the same currency and compatible units. For a single homogeneous shipment received in full, dividing total cost by its received units is straightforward. A mixed shipment requires allocation. A partial receipt, damaged goods, returns or a later freight invoice requires an explicit policy for quantities and costs rather than blindly dividing the full PO cost by the first receipt.
Under IFRS, IAS 2 includes purchase, conversion and other costs of bringing inventory to its present location and condition. Apply the framework relevant to your business. Recoverable taxes, financing charges and selling expenses should not automatically be included simply because they appear on a payment or invoice.
What belongs in the cost pool?
| Record | What to check |
|---|---|
| Supplier invoice | Goods price, discounts, included transport and separate surcharges |
| Carrier or forwarder invoice | Relevant freight and delivery charges |
| Customs or broker documents | Assessed duties and other charges for this shipment |
| Insurance or handling record | Relevant shipment allocation and whether already included elsewhere |
| Credits and corrections | Whether they change goods cost, charges or quantity |
A tariff estimate is not a current tariff determination. Classification, origin and the applicable rules matter. Retain the assessed shipment documents and distinguish estimates from actual charges.
Similarly, a supplier payment surcharge and a merchant-processing fee on a customer sale have different purposes. Classify them under the accounting policy before deciding which cost pool they affect.
A single-product example
Assume a fictional shipment of 80 bags, each weighing 60 kilograms, at $15 per kilogram. All 80 bags are received and accepted. The example assumes zero duty solely to isolate the arithmetic; it makes no claim about a current import rate.
| Component | Amount |
|---|---|
| Goods: 80 × 60 × $15 | $72,000 |
| Freight | $3,200 |
| Assumed duty | $0 |
| Cargo insurance | $504 |
| Eligible handling | $480 |
| Total cost pool | $76,184 |
Allocated cost is $952.30 per bag, or about $15.87 per kilogram, retaining full precision for subsequent calculations. The goods-only price is $900 per bag. The $52.30 difference is approximately 5.81% of that goods-only price.
Use the quantity and cost basis appropriate to the next calculation. A recipe measured in kilograms cannot use the per-bag price without a conversion.
Allocating shared charges
For mixed items, choose and document a basis that reflects the cost and available evidence. Weight or volume may suit a transport charge; value may suit some insurance charges. No one basis is always most accurate.
A fictional shipment contains 100 units of A costing $10 each and 50 units of B costing $20 each. Goods value is $2,000 and shared eligible freight is $300.
| Allocation method | Freight to A | Freight to B | Resulting unit cost A / B |
|---|---|---|---|
| By goods value | $150 | $150 | $11.50 / $23.00 |
| By unit quantity | $200 | $100 | $12.00 / $22.00 |
Both methods allocate the same $300, but produce different item economics. Quantity allocation only makes sense if the quantity basis is meaningful for the charge; mixing cases of different sizes can distort it. Retain the method, source amount and any manual allocation so a reviewer can reproduce the result.
Estimates, receipts and later corrections
A PO can carry expected freight before the actual bill exists. Receiving establishes the quantities accepted and still due. A later carrier invoice may then change the cost estimate. Keep each event and its evidence identifiable.
Decide how a correction affects remaining inventory, already-used goods and downstream reports under the applicable policy. Do not assume that editing an operational cost automatically restates a posted accounting period.
For invoice review, check the supplier's agreed terms, actual charges, relevant receipts and prior invoices or credits. Three-way matching supports this review; an allocated charge does not automatically approve an invoice or authorize payment.
Why buyers use the result
Landed unit cost can support supplier comparisons, recipe or component estimates, and the capital component of holding cost. Keep compared figures on the same basis. A goods-price PPV and a total acquisition-cost variance answer different questions; adding freight only to one side does not isolate a supplier price change.
A revised cost may change the value ranking in ABC analysis, but an ABC class does not automatically set a service target. Likewise, a cost update can affect estimated product economics without changing recognized profit immediately. Sales timing and the inventory-costing policy still matter.
Landed-cost allocation in LineNow
LineNow's order workflow supports allocation of additional costs by value, quantity, equal split or manual allocation. Review the item-level result and the unit basis before applying it. For eligible changed allocations, the workflow offers an explicit choice to update past usage costs; this is distinct from proving a historical accounting restatement.
The landed-cost workflow guide shows how this fits a living purchase order. Bring a two-item shipment, a partial receipt and a later freight correction to a demonstration. Confirm feature eligibility, permissions, the accounting mappings and which downstream records change.
Explore LineNow's procurement workflow.