Understanding how to calculate the landed cost of imported goods is essential for anyone involved in global trade
Not understanding. or not taking all of the relevant costs into account will have a negative impact on the profitability of the products that you are importing.
This guide will help you to understand:
- The definition of landed cost
- What elements should be included in the landed cost of imported products
- How to calculate the landed cost of imported goods
The definition of landed cost
The landed cost of imported products includes all of the costs associated with getting the products from an overseas supplier to an importers premises (or their nominated third party logistics service provider) and includes the categories of costs as described in detail below
What elements should be included in the landed cost of imported products
There are 8 essential elements to consider when calculating the landed cost of imported goods these include:
1. The Cost of the Goods
The cost of the goods is the amount you pay to the supplier to purchase the goods.
Its is important to understand the terms of the purchase – most global trade is undertaken in line with International Chamber of Commerce INCOTERMS® rules which provide specific guidance to individuals participating in the import and export of global trade.
The INCOTERMS® will determine which costs are included in the purchase price being charged by the supplier
The most common INCOTERMS® are:
- FOB (Free on Board) – means that the seller fulfills their obligation when the goods have passed over the ship’s rail at the named port of the shipment. The buyer bears all costs and the risk of loss or damage to goods from that point forward.
- CIF (Cost Insurance and Freight) – means that the seller fulfills their obligation when the goods have passed over the ship’s rail at the named port of the shipment. The seller pays for the cost of freight to the named port of destination but the buyer assumes all risks and any further costs from that point forward.
2. International Freight Charges
International freight charges are the costs associated with transporting the goods from the port of departure in the origin country to the port of arrival at the destination country.
Goods can be shipped by air freight or sea freight. Air freight is generally quicker but can be very expensive while sea freight takes longer but is a more economical than air freight. Depending on the size of your shipments – goods shipped by sea freight can be sent as a full container load (FCL) or consolidated with other importers shipments as an LCL (less than full container load) shipment.
It is important to ensure that the various surcharges that are quite often charged by shipping lines and airlines are included in your landed cost calculation. Surcharges associated with international freight charges include:
- Air freight – Fuel and security surcharges
- Sea freight – Bunker adjustment fees, peak season surcharges, low sulpher surcharges and security surcharges, general rate increases
3. Import Duty and Taxes
Import duty and taxes are paid to the local customs authority at the time of importation and the rates of duty and taxes (GST / VAT) will vary from country to country
Customs authorities use the Harmonized Commodity Description and Coding System developed by the World Customs Organization (WCO) to classify imported goods and to assign a Harmonized System Code, often referred to as a HS Code, to the imported goods. The HS Code will determine the relevant rate of duty to be applied to the customs value of the goods.
Governments also use HS codes to collect global trade statistics.
The customs value, normally the purchase value of the goods, multiplied by the duty rate will determine the amount of duty that is payable and to be included in the landed cost calculation.
4. Local Handling Charges
Local handling charges are the costs incurred at the port of destination and are normally charged by the shipping lines, airlines or the freight forwarder. Local handling charges include:
- Air freight – airline terminal fees, airline cargo reporting fees, airline security fees, import terminal fees, import document fees, freight forwarder handling charges
- Sea freight – port charges, shipping line cargo reporting fees , port security fees, delivery order fees, freight forwarder handling charges
5. Customs Clearance Charges
Customs clearance charges are incurred at the port of destination and are normally charged by your customs broker or your freight forwarder. These charges are for assigning the relevant HS code, calculating the customs value and creating and lodging a customs entry with the relevant authorities, Custom clearance charges include:
- Agency or brokerage fees and associated costs for lodging customs entries with the relevant authorities , fees for including additional suppliers or HS code classifications on customs entries if not already included in the agency or brokerage fee, fees and associated costs for lodging bio security / quarantine entries with the relevant authorities , physical inspection of goods if required by relevant authorities
6. Local Delivery Charges
The local delivery charges are uncured at the port of destination and are normally charged by your customs broker or freight forwarder. These charges are for the costs associated with transporting the goods from the wharf if shipped as an FCL or from the cargo freight station (CFS) if shipped by air or LCL modes. Local delivery charges include:
- The cost of transport, fuel surcharge fees, wharf / depot booking fees, wharf / depot infrastructure fees, trailer hire fees , waiting time, road and rail transport tolls
7. Finance and Insurance Charges
For completeness any finance and insurance charges directly related to the goods being imported should be included in the landed cost calculation. Finance and insurance charges include:
- Fees paid to banks in relation to financing the imported goods, foreign exchange fees, any disbursement fees charged by freight forwarders, the cost of insuring the imported goods against the risk of loss or damage
8. How to Allocate the Import Costs
The sum of the international freight charges , the import duty and taxes, the local handling charges, the customs clearance charges and local delivery charges make up the total import charges.
When the total import charges are added to the total cost of the goods the total landed cost for the shipment will have been calculated.
This is OK if only one product has been imported but in most cases that will not be the case and therefore a more meaningful calculation is when the total import charges are allocated at the product level and a landed cost per product is calculated.
The two most common methods for allocating the import charges is to allocate based on the total value of each product or based on the total number of units of each product
Allocating by value will assign a portion of the import charges to each product based on the total value of the product relative to the total value of the invoice whereas allocating by units will assign a portion of the total import charges to each product based on the total number of units for each product relative to the total number of units on the invoice
How to calculate the landed cost of imported products
Below is a simple example of how to calculate the landed cost of imported products into the USA
Assume the FOB value of the imported goods is USD 10,000 and there are four products as per the sample invoice
Add the total import costs to the cost of the goods to get the total landed cost
Allocate the total import costs based on units and value to get a landed cost per unit – note the different landed cost per unit values when the total import costs are allocated based a percentage of units vs value
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