/ IFRS guide
Landed Cost Explained
Why the number on your supplier invoice is never your real cost — and how to calculate the one that is.
Most trading businesses price and measure margin off the purchase invoice alone. That invoice price is rarely what the inventory actually cost to get onto your shelf or into your warehouse — and the gap between the two is where a surprising amount of "missing" profit goes.
What landed cost actually includes
- Purchase price
- Freight and shipping
- Marine or cargo insurance
- Customs duties
- Port handling, demurrage, and clearing agent fees
- Any other cost directly attributable to getting inventory into a sellable location and condition
A simple example
- Purchase price: AED 40,000
- Freight: AED 3,200
- Insurance: AED 400
- Customs duty (5%): AED 2,000
- Handling and clearing: AED 800
- Landed cost: AED 46,400 — 16% higher than the invoice price
If you price and measure margin off the AED 40,000 invoice figure, every unit sold is quietly underpriced by that 16% gap. Multiply that across a year of shipments and it's easy to see how a business can be growing revenue while its real profitability quietly erodes.
Where this comes from under IFRS
IAS 2 Inventories requires the cost of inventories to comprise all costs of purchase, costs of conversion, and other costs incurred in bringing inventories to their present location and condition. Costs of purchase specifically include the purchase price, import duties, transport, and handling — less any trade discounts and rebates. Freight and duty aren't overhead; under IFRS they belong in the cost of the inventory itself.
Common mistakes we see
- Averaging landed cost across dissimilar shipments instead of allocating by shipment, weight, or value
- Booking freight and duty to a general expense account instead of capitalizing them into inventory
- Ignoring FX movement between the invoice date and the payment date on foreign-currency purchases
- Never revisiting landed cost assumptions as freight rates change
Getting landed cost right isn't a bookkeeping nicety — it directly determines whether you know your real margin, which is exactly the number your pricing decisions depend on.