Landed cost: why your margins are better on paper than in the bank
Freight, duty and clearing are part of what goods cost. Leave them in expenses and every margin is overstated. How to load landed cost without double-counting.
For importers, distributors and anyone paying freight on stock · 3 min read · updated
In short
- Landed cost is purchase price plus everything spent getting the goods here and saleable.
- Outward freight and creditable GST are not landed cost.
- Freight typically spreads by weight or volume; duty and insurance by value.
- Loading the charge onto stock without reclassifying the expense counts it twice.
- The correct entry is DR Inventory, CR expenses included in valuation — a reclassification.
- A charge applied only going forward leaves every sale since the receipt costed too low.
The number that is wrong
You buy 100 units at ₹400. Freight and clearing come to ₹6,000. You sell at ₹520 and report a 30% margin.
You did not. The units cost ₹460 landed, so the margin is 13%. The ₹6,000 is sitting in a freight expense account, reducing profit somewhere you are not looking at when you price.
At small volumes this is an annoyance. On thin-margin distribution it is the difference between a product that makes money and one that does not, and it is invisible in every report that reads cost from the purchase invoice alone.
What counts as landed cost
Anything paid to get the goods to a saleable condition and location: inward freight, customs duty, clearing and forwarding, insurance in transit, port and handling charges, and non-creditable taxes.
What does not count: outward freight to the customer (that is a selling cost), storage after arrival, and any GST you can claim as input credit — a credit is not a cost.
Ind AS 2 and AS 2 both say this directly: cost of inventories comprises purchase cost, conversion cost, and other costs incurred in bringing the inventories to their present location and condition.
Spreading it: by value or by weight
A charge has to be split across the lines it arrived with, and the basis changes the answer. Freight usually follows volume or weight — a tonne of cement and a box of chips do not share a lorry equally. Duty and insurance usually follow value.
Getting this wrong loads cost onto the wrong items, and nothing looks broken afterwards: every total is still right, only the per-item costs are wrong, so the margin report quietly misprices your cheapest lines.
The trap when you fix it
Here is the one worth reading twice. The freight bill has already been posted: DR Freight Expense, CR Cash. When you then load ₹6,000 onto the stock, the balance sheet gains ₹6,000 of inventory — and if nothing else happens, the P&L still carries the ₹6,000 as freight. You have counted it twice.
The correction is a reclassification, not a second expense: DR Inventory, CR an "expenses included in valuation" account. Net of the original bill that comes to DR Inventory, CR Cash — which is what actually happened. Money left, and the stock is worth more.
Use one account for every kind of charge rather than crediting freight, duty and clearing back individually. A charge can be booked anywhere a person chose, and scattering the reversal across the P&L makes it unauditable.
Do it when the bill arrives, not at year end
The freight invoice usually turns up a week after the goods. If your system can only apply the charge going forward, every sale in between was costed too low and the average is wrong from then on.
What you want is a system that restates the original receipt and replays the valuation of everything after it. Ask that question specifically — it is the difference between landed cost that works and landed cost that works if your paperwork is unusually fast.
Common questions
- Should GST paid on imports be part of landed cost?
- Only the part you cannot claim. IGST on imports is generally available as input tax credit and is therefore not a cost of the goods. Basic customs duty is not creditable and is part of the cost.
- What about freight to my customer?
- That is a selling and distribution cost, not a cost of bringing the goods to their present location. It stays in the P&L and never touches stock value.
- Is landed cost the same as cost of goods sold?
- No. Landed cost is what an item cost to get into your stock, saleable and in place. Cost of goods sold is that landed cost for the items you actually sold in a period; the rest stays in inventory.