Landed cost is the total cost of getting an item onto your shelf, rather than the figure on the supplier invoice. It includes freight, duty, insurance, handling and anything else paid to move the goods from the supplier to you. Businesses that do not track it are not usually unaware that these costs exist; they simply account for them separately, as overhead, which produces a specific and predictable distortion.
The distortion
When shipping and duty are booked to overhead rather than to the item, every product appears to cost what the supplier charged, and the difference is absorbed into a general pool that is spread evenly across the business. That treatment is defensible for accounting purposes and misleading for pricing decisions, because it flatters the products that are expensive to ship and penalises the ones that are not.
Consider two components bought at the same unit price. One is light, sourced domestically, and arrives on a pallet with twenty other items. The other is heavy, imported, and attracts duty. Priced from the supplier invoice alone, both appear identical, and the margin you believe you are making on the products containing the second component is wrong by whatever the freight and duty amount to. It is not unusual for that to be ten to fifteen per cent of the item cost, which is frequently larger than the margin itself on competitive work.
How allocation actually works
A shipment carries charges that apply to the whole consignment rather than to any one line, so those charges have to be divided across the lines somehow. The two common bases are value and quantity. Allocating by value spreads the cost in proportion to what each line is worth, which suits consignments of broadly similar goods. Allocating by quantity spreads it per unit, which suits shipments where the cost driver is volume rather than value.
Neither is universally correct, and the honest position is that both are approximations of a weight or volume basis that most systems cannot calculate because they do not hold reliable weights. The important thing is that the charge reaches the item cost at all. An approximate allocation is substantially more accurate than leaving the cost in overhead, where it is allocated to everything equally by default.
What changes once you track it
- Product margins become comparable, because each carries the cost of getting it here.
- Sourcing decisions can account for total cost rather than headline price, which sometimes reverses the apparent winner.
- Job costing improves automatically, because the works order consumes items at their real cost.
- Stock valuation reflects what the stock actually cost you rather than what it was invoiced at.
The last point has an accounting consequence worth understanding before you change anything. Moving freight and duty into stock value means those costs are held on the balance sheet until the goods are sold, rather than being expensed when incurred. That is the correct treatment under normal circumstances, but it does change the timing of when the cost hits your profit and loss, and it is worth a conversation with your accountant rather than a surprise at year end.
Where to start
Take your three highest-volume imported items and work out the true landed cost for a recent shipment by hand. Compare it with the figure you have been using. If the difference is small, landed cost tracking is a refinement you can schedule for later. If it is not, you have been pricing against a number that was never correct, and the size of the gap tells you how urgent the fix is.
Brytebuild captures freight, duty, insurance and handling at goods-in and allocates them by value or quantity into the receipt unit cost, so the charge flows through to valuation and job costing without a separate journal. See the planning and purchasing features for how it fits into the wider flow.