How to calculate the landed cost in 3 steps with an example

You are currently viewing How to calculate the landed cost in 3 steps with an example
  • Post last modified:August 17, 2020
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If you run a small to medium-sized business, or even if you’re part of a large corporation, you may feel that international shipping can be overly complex and unpredictable landed costs. So, learn how to use this the three steps method to calculate the cost of your imported products.

Understanding the landed cost of imported products allows a business to plan how much capital will have to be invested to purchase products and get them delivered through to location. On top of that, it also helps you to plan your selling prices and profit figures that will eventuate when your products are sold.

What is the landed cost?

The total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. In some instances, it may also include the customs duties and other taxes levied on the shipment.

The total cost can include a range of additional factors, such as:

  • insurance
  • currency exchange
  • storage, demurrage
  • regulatory fees, including export licenses
  • port local handling fees, and packing and repacking
  • payment processing
  • duties, such as sugar levy

If you do not take the time to understand your expenses, you could be faced with unexpected fees and charges which could make importing the products unfeasible. Calculating the final cost requires an understanding of some key costs and correctly applying them to each product to get the final landed cost per sku.

First thing first, as a buyer you need to understand and evaluate all costs and applied charges to your products all through the supply chain.

Photo by Sonder Quest on Unsplash

1. Know your products

A detailed proforma from the exporter. The proforma should include the following details:

  • Seller details, full address and bank details.
  • Incoterms®
  • Port of Loading (POL) & Port of Discharge (POD)
  • The currency of the agreement.
  • Product details and pricing.
  • Commodity Code – HS codes
  • Box and packaging sizes, gross weight, pallet size.
  • Shipment type (by Full Container – FCL, or Less-than-Container-Load LCL Cargo).

Here is a detailed guide to look for the product’s Commodity Code in gov.uk

When you fully understand above cost and details you would write down followings,

How much is a sku?

What are the duty / vat charges applied to the sku?

What is actual foreign currency exchange rates?

I recommend you to work on a spreadsheet to create a cost calculation formula. You can easily top up these costs or switch between container size cost and SKU cost.

Keep the data history of those costs, especially currency rates. You might want to recall last years’ expenses.

Pro tip: if you get incentives or marketing supports from the seller, note them as well and apply where available.

2. Calculate your transport cost and storage charges

Transportation is a core element of a landed cost. In general, as the speed of transportation increases, so does the cost of shipping. For example, if you need your shipment sent overnight by air, you should plan for a higher cost than if you have time to ship by ground.

You can contact a freight forwarder to get a confirmed quotation to get products shipped through to your location. Most global trade shipments are sold on the FOB which means that the consignee (buyer) will pay for all additional costs and charges after the goods have been loaded onboard the vessel for export.

A freight forwarder’s offer

  • Seafreight from Port of Loading to Port of Discharge
  • Local charges in the country of import. Take these costs in your local currency. These include local port handling expenses such as documentation, customs clearance, quarantine, ISPS, etc.

Insurance

In most countries, duty is assessed on what’s called CIF (cost of goods, insurance, and freight). This means if the insurance cost increases so do the duty amount, which drives up the expenses.

Pro tip: Understand your Incoterm, Work with logistic experts to identify ways to reduce your shipping cost.

Storage fees

You may occasionally be required to pay storage fees, also known as demurrage, relating to storage of goods at the port. This is a charge levied on container shipments left in the terminal after the allotted free time.

Pro tip: Use a single carrier, to take care of all your international shipping needs, from pick up to customs clearance through final delivery, to reduce your risk of storage charges in the terminal.

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Photo by Karolina Grabowska on Pexels.com

3. Customs, duty and taxes

Like duties, domestic taxes are a primary component to a landed cost. Some countries have more beneficial tax policies than others, and it is important to review these in advance. Access resources such as the gov.uk for advice on in-country sales taxes and for help identifying possible tax breaks.

If you supply the HS Code for the goods to import, the freight forwarder or customs broker can confirm what rate of duties will be applied to the imported goods. Also, confirm how the import duty is charged on your product. This process varies from country to country so get a confirmation for your situation.

Understand the local tax rate (VAT) and how it is applied to imported goods.

All customs documentation should be filled out as completely and accurately as possible to determine the proper duties. An agency that specializes in global trade compliance, advises shippers to pay special attention to the commercial invoice, the primary piece of customs documentation when shipping internationally

Among various easy-to-make mistakes, it is common for shippers not to give the full address and contact information of the consignee, or to forget to specify the currency of the shipment’s value. Most importantly, giving a poor product description ultimately impacts classification and the duty associated with it. These types of inaccuracies can lead to delays at customs, which may drive up the expenses.

Also, check whether a free trade agreement is in place with your destination country. If so, your product could be eligible for tariff relief, which will lower your landed cost.

Example landed cost calculation of an imported food product

Let’s go through an example of calculating a landed cost for an order:

Your total purchase cost from your manufacturer is £10 per box, and order is four boxes.

The order is £40

The FOB freight cost is £4

Customs and import duties end up being £2

What is the final cost?

£16 per box

In this case, hopefully, the item is marked up to significantly more than £16, since that would have you just breaking even. Of course, there can be damaged inventory, returns, and other costs of doing business that will result in additional losses.

Conclusion

Understanding your landed costs is crucial to knowing your profitability. If you aren’t using cogs in your profitability calculations, you might be missing out on critical information and jeopardizing the future of your business.

Bonus – UPS’s landed cost calculator

https://www.ups.com/us/en/services/international-trade/tradeability.page?

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