The cost of goods increases on the basis of shipments, customs charges, and the price of the goods. In simple words, a consumer is required to pay the transportation fee along with the product price upon purchasing the goods. (SFSP) Therefore, one can get the landed cost definition by understanding the procedure.
The combination of the shipping cost, custom duties, and retailing price of the product is known as the landed cost. Hence, the landed cost definition can be understood by measuring the shipping, custom, and product value.
For example, Shipping charges = INR 500
Product value = 1200
Custom = 200
Landed cost = 500+1200
= INR 1700
The landed cost of goods can be calculated by simply applying the formula listed below.
The basic equation that one is required to calculate is:
Landed cost = Customs + Overhead + Risk + Shipping
Let us understand the equations for the calculation mentioned above.
The Shipping cost is associated with various aspects such as packing, freight, crating, and handling. Therefore, after calculating all these aspects, one can measure the shipping cost of the goods.
Every nation has a designated authority to monitor the goods coming inside and moving outside the border. A custom authority will not allow certain goods if it is outlawed in that country. The authorities are responsible for imposing customs duties, tariffs, and taxes in order to let the goods be transported inside the country.
The addition of the risk factor is equally essential for the calculation of landed cost, or the company may incur a loss.
Costs such as travel, exchange rates, and purchasing staff are included under overhead.
Hence, one can measure the landing cost after calculating the abovementioned equation.
Let us understand the case study to better comprehend the calculation and definition of landed cost.
Mr. X is a businessman owning a factory in South Africa that sells RG shoes worldwide. Sri Lanka is an excellent business partner of Mr. X, which offers him the ease of doing business in their country. Sri Lanka has also provided him marine insurance policy in order to cover the losses.
Mr. X, at the end of every month, sends the shoes made by his company to further sell to the people of Sri Lanka. The Board of Directors of RG shoes have decided the value of 1000 shoes as USD 2000. Further, the shipping charges incurred by Mr. X are USD 130. The risk has been calculated as USD 100. Additionally, the overhead charges incurred by Mr. X are USD 50.
Hence, Mr. X needs to add all the charges in order to find the landed cost.
Landed Cost = 2000+ 130+ 100 + 50
= USD 2400
Conclusion
Understanding the landed cost definition is crucial to determine the value of a product. Further, it is equally vital for a company to purchase a marine insurance policy to prevent losses. A marine insurance policy is crucial for the ease of doing business. Hence, every business person should buy a marine insurance policy.
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