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By: Anju A.P

Advantage of Calculating Landed Cost in Business

Landed costs amount to the sum of the total price of a product when it arrives at buyer’s doorstep. It can be called as an all-inclusive cost of a product that sums up every charge associated with product/service including the original price of the product, their transportation fees (both inland and ocean), customs, duties, taxes, tariffs, insurance, currency conversion, crating, handling and payment fees. All of these individual costs are part and parcel of the value of received goods and tracking the overall item costs, helps the businesses in establishing their proper sales prices and thereby determining the actual margin per product.

Even the third-party freight or an import voucher that is received subsequent to a purchase, the item voucher should be retroactively applied back to the item cost. To put it simply, landed costs are the total sum amount or the total cost of a landed shipment including their purchase price, freight, insurance, customs duties and other costs up to the port of destination. 

For example, if you sell a garment for $25.( i.e. total revenue), but the total cost you took to buy the garment is $10 and the charge you invested to ship the product is $5( Cost of sale-Landed cost). In that case, the total profit earned by you is$5. Without considering landed costs, one can also report the profit on the item as $10, but it can only mislead in making poor buying decisions by the merchants. Therefore calculating the landed cost is inevitable for a successful and long-lasting business run.

Why Landed Cost is important to business?

Automating landed cost calculations is pivotal when it comes to the current global economy. In the fast-paced business environment, there is no time for the company or the subsequent accounting department to sit and perform the manual calculations. Also neither the business owner wants to lose on profits.

Especially when the company or business is involved in an international trade where you import goods from other countries, it should enhance the profitability, not any chapter of loss. In this case, it is highly essential and critical to get the landed cost right to engage in healthy global trade.

 The landed cost is not only subjected to the profitability of the higher strata of business people but also to the smaller and medium-sized businesses. It is equally important for them as well to understand the landed costs in order to ensure profitability in the business via proper forecasting. 
 

The following are the major benefits in calculating the landed costs in business:

1. Accurately calculate profit on every item
Landed costs give a precise and accurate idea of how well the business is performing. Landed cost can redundantly calculate the profit on every product.
 
2. Ensure sales prices are profitable 
Landed costs get to see the real cost of products, giving the merchants the ability to forecast on what price the goods/service has to be sold for and the maximum discount that can lead to an assurance of profit.
 
3. Analyze where savings can be made in the supply chain
Also, the landed cost enables to see the different costs involved in purchasing goods, thereby quickly analyzing and tracking, where you can save the resource during supply chain management.
 
4. Correctly account for landed costs for accurate financial reports
Accounting for landed costs allows seeing accurate asset values and accurate monthly profits for the business.
 
Who is affected by landed costs?

The sales manager

The sales manager needs to consider landed costs as they decide what price to sell items at and ensure sales are profitable and competitive. Accurate costs can help sales managers to calculate sales prices.
 
The merchandise planner/buyer

The merchandise planner or buyer is responsible for which products to buy, making sure the business buys the most profitable and best-selling items. Landed costs provide the accurate cost of sales to help them see which items have the highest margins.
 
The bookkeeper/accountant

The bookkeeper or accountant provides balance sheets and profit and loss reports for the company. Incorporating landed costs will allow the bookkeeper/accountant to see accurate asset values and monthly profits for the company in a valuable and timely fashion.
The ability to source products from around the world offers businesses opportunities to reduce costs and increase product availability, potentially resulting in strategic and profitability gains. However, the opportunity also brings the challenge of accurately calculating true cost and profitability analysis. Landed cost is the process of capturing all these costs associated with the acquisition of goods, enabling businesses to accurately calculate inventory valuation by including these associated costs, whether the costs are known at the time of receipt of the goods, or sometime after.

Landed cost in Odoo

Calculating landed costs-the total cost of a product from start to finish can be complex and tedious for companies in wholesale distribution, as they always need to keep a tight control over the cost. When the margins are tight, its highly appreciable if we know were the major outgoings are and how they influence in investment returns. Without this knowledge, no company can find their real profits, if they keep wiped out by the unexpected expenses. 
Therefore every company should own a software tool that enables their businesses to efficiently and effectively manage their supply chain. 

What factors need to be considered?

Calculating landed costs can be extremely complex when supply chain become more fragmented and global making businesses harder in managing and handling. Odoo (Open ERP), comes with a default landed cost module for efficiently calculating the selling price of a product by considering different factors. 

In Odoo, the end user can add Freight, Insurance, duties, taxes, tariffs, currency conversion, creating, handling etc cost as a product and differentiate them with the normal product. The Service costs specified for each landed service gets calculated in Odoo’s purchase order as the Total Landed cost.

One can also split landed cost in different category like Order Level (Which get applied on the PO Order level), Order line level (PO line level calculation), per container (Calculated based upon no. of container PO has).

Also, we add the landed cost concept to the Purchase order and pass it to the Shipment of the product level.

The Landed Costs Total Untaxed shows the total value of the purchase order including these landed costs.

Also, Odoo( Open ERP ) shows the landed cost giving you the bifurcation of the order level landed cost based on product quantity, product volume or product weight.

The Price Unit in Odoo gives the information about the unit price of these products or unit prices of the lot getting created, after the addition of the landed cost.

To know on how to configure Landed cost in Odoo kindly refer our previous blog: How to configure Landed cost in Odoo





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