Landed cost: adding freight, duty and brokerage to a factory quote

Say a factory quotes you 11 cents a unit and your books end up at 14. The 3 cents in between is freight, customs duty and brokerage, the costs the goods pick up between the factory and your shelf, and none of it was on the quote.

Quoted price and landed cost

The quote is what the goods cost at the factory door. Landed cost is what they cost sitting in your warehouse ready to fill or sell, after the ocean freight, the duty for that category and the customs broker have all been paid.

Margin gets worked out against cost, so if the cost in your system is the factory quote, your margins come out high by whatever you left out. You won't spot it on any one order, but over a year it adds up, and it doesn't land evenly. Cheap, bulky goods pick up much more freight per dollar of value than small, pricey ones, so the products that look best in your reports can be the ones freight is hitting hardest.

Spreading it across the lines

• Go by each line's value, not an even share per line. A $300 line of caps shouldn't carry the same share as a $4,000 line of glass jars.
• Leave free lines out. A replacement or a sample the factory threw in has a zero subtotal, and loading freight onto it would put a cost on goods you never paid for.
• Wait until the bills are in. Freight, duty and the broker's invoice often show up after the goods do.

Freight on a purchase order

A purchase order here has three cost fields next to its lines: shipping, customs duties, and brokerage or tariff fees. You can fill them in or change them any time before the PO is received, as the real invoices come in. If the new figures push a PO that's already been submitted over your approval threshold, someone allowed to approve that total has to enter them.

When the last line is received, the total of those three fields is spread across the priced, stockable lines in proportion to their value, and each line shows its landed cost per unit under the quoted price. That landed figure becomes the item's cost, so the margins you see from then on include what it took to get the goods to you. Enter the final freight, duty and brokerage figures before you receive the last line, because that's when the spread happens and the fields lock after it.

Spreading by value is a simplification, since real freight follows weight and volume more than price. It's consistent, though, and when an order is received in full, every dollar of freight, duty and brokerage lands on the stock you bought. If you close a PO short, the extra isn't spread and the items keep the price on the PO. If a cheap, bulky item comes in on an order of its own, all of that order's freight lands on it and you'll see it in the landed figure. For the timing side of the same freight choice, see why we split lead time in two.