Landed-cost accounting means adding every cost of getting purchased inventory to your warehouse — purchase price, international freight, insurance, US customs duty, broker and port fees, and inland delivery — into the unit cost of each item in stock, instead of expensing those charges as general overhead. It applies to US importers, wholesalers, distributors, e-commerce sellers, and manufacturers that buy materials abroad. Under US Generally Accepted Accounting Principles (GAAP), those acquisition costs belong in inventory on the balance sheet until the item sells. The biggest limitation: if freight and duty never reach the item level, per-product gross margins are unreliable, so pricing decisions rest on understated costs.
Quick answer
Landed cost per unit = (purchase price + allocated freight + insurance + customs duty + port, broker, and inland-freight charges) ÷ units received. Allocate each shipment-level charge across the stock keeping units (SKUs) on the shipment using the driver that matches the cost — weight or volume for freight, customs value for duty and insurance, units or value for flat fees — then post the total to inventory under US GAAP, and release it to cost of goods sold (COGS) as items sell. This page covers bringing freight and duty into unit inventory cost; the cost of goods sold formula for a small business and inventory management system selection are covered separately. For the broader sector context, see our industry finance guides for small businesses.
What is landed cost, and who needs landed-cost accounting?
Landed cost is the total cost of a unit of inventory delivered to your door: the supplier’s price plus every charge incurred to bring that unit to its present location and condition, ready to sell or to use in production. Any US business that imports physical goods — or that pays meaningful freight, duty, or handling charges on domestic purchases — needs this number at SKU level for three reasons:
- Pricing. A product sold below its landed cost loses money on every unit, no matter what the supplier invoice says.
- Accurate books. US GAAP measures inventory at cost (subject to a lower-of-cost ceiling discussed below), and “cost” includes acquisition charges, not just the invoice price.
- Tax compliance. Federal tax rules similarly require transportation and other acquisition charges in inventory cost for taxpayers that must account for inventories.
Which costs belong in inventory cost under US GAAP and tax rules?
Three different rule sets touch the same dollars, so name the basis before booking anything:
Book accounting (US GAAP). Inventory is an asset measured at cost, including the purchase price and the charges needed to get the goods to your location in sellable condition — inbound freight, marine insurance, customs duty, broker and port fees, and receiving costs. The Financial Accounting Standards Board (FASB) then caps the carrying amount: under Accounting Standards Update 2015-11, Inventory (Topic 330), inventory measured by first-in, first-out (FIFO) or average cost is carried at the lower of cost and net realizable value (NRV) — the estimated selling price less reasonably predictable costs of completion, disposal, and transportation — while last-in, first-out (LIFO) and retail-method inventory keep the older lower-of-cost-or-market test:
“An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value.” — Financial Accounting Standards Board, ASU 2015-11
Selling costs, outbound freight to customers, and abnormal waste are period expenses, not inventory cost.
Tax treatment (federal). If you produce, purchase, or sell merchandise, the Internal Revenue Service (IRS) generally requires you to keep an inventory and use an accrual method for purchases and sales, per IRS Publication 538 (accessed July 28, 2026), which also provides an exception for qualifying small business taxpayers. On what “cost” includes, the inventory regulation is explicit — after the net invoice price:
“To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods.” — Code of Federal Regulations, 26 CFR § 1.471-3(b), Inventories at cost
Larger resellers and producers face a second layer: the uniform capitalization rules of Internal Revenue Code Section 263A require inventory to absorb direct costs plus “such property’s proper share of those indirect costs (including taxes)” allocable to it. Section 263A(i) exempts taxpayers (other than tax shelters) that meet the Section 448(c) gross receipts test — average annual gross receipts for the prior three tax years at or below $25 million as indexed for inflation, which is $32,000,000 for taxable years beginning in 2026 per IRS Revenue Procedure 2025-32. So a small importer under that threshold generally follows the Section 471 cost rules, while a larger one must also capitalize allocable indirect costs. Book and tax inventory cost can therefore differ; keep the reconciliation.
Management reporting. Regardless of book or tax basis, owners need landed unit costs in their margin reports, because supplier-price-only margins overstate profitability. That is a reporting choice, not a compliance question.
How do US customs duty and import fees work?
Customs duty is a federal charge administered by US Customs and Border Protection (CBP); state sales and use taxes on the later resale are a separate matter outside this article. Three numbers determine what you pay on an entry:
- Classification. Each product is classified in the Harmonized Tariff Schedule (HTS), and the classification sets the duty rate. CBP’s Determining Duty Rates page (accessed July 28, 2026) cautions that classification is fact-specific — and that you can request a binding ruling for certainty:
“CBP makes the final determination of what the correct rate of duty is, not the importer.” — US Customs and Border Protection
- Customs value. Duty is usually ad valorem — a percentage of the customs value. The primary valuation method is transaction value, defined in CBP’s informed compliance publication on transaction value (accessed July 28, 2026) as:
“the price actually paid or payable for the merchandise when sold for exportation to the United States” — US Customs and Border Protection, 19 U.S.C. § 1401a(b)(1)
The same publication notes that the importer of record is responsible for using reasonable care to enter, classify, and value the merchandise, and that value must be determined entry by entry, product by product.
- Fees. As of July 2026 (accessed July 28, 2026), CBP’s user fee table lists the merchandise processing fee (MPF) for formal entries at 0.3464% of entered value with a $33.58 minimum and $651.50 maximum, and the harbor maintenance fee (HMF) at 0.125% of the value of merchandise shipped through ports. On a $10,000 formal ocean entry, that is $34.64 of MPF and $12.50 of HMF — small, but they are inventory costs too.
Worked example: allocate one shipment across three SKUs
The following is a hypothetical illustration with made-up inputs. A fictional US importer receives one ocean shipment containing three SKUs bought at arm’s length, so the customs value equals the $10,000 purchase price. The 5% duty rate is invented; a real rate comes from each product’s HTS classification. All figures are in USD.
Table 1: Hypothetical shipment inputs (made-up).
| SKU | Units | Unit purchase price | Purchase value | Gross weight |
|---|---|---|---|---|
| A — compact pumps | 200 | $10.00 | $2,000 | 100 kg |
| B — industrial valves | 300 | $20.00 | $6,000 | 450 kg |
| C — seal kits | 500 | $4.00 | $2,000 | 150 kg |
| Total | 1,000 | $10,000 | 700 kg |
The shipment-level charges (made-up): ocean freight $1,400; marine insurance $100; customs duty at 5% of the $10,000 customs value = $500; customs brokerage and port fees $300; inland freight to the warehouse $300. Total add-on: $2,600. Total landed cost: $10,000 + $2,600 = $12,600.
Interpretation: the inputs show why one allocation basis cannot work — SKU B carries most of the value but also most of the weight, while SKU C is half the units but only a fifth of the value. The basis you choose changes each SKU’s cost.
Table 2: Allocating the $2,600 add-on across SKUs (method: match each cost to its driver).
| Cost line | Allocation basis | Rate | SKU A | SKU B | SKU C | Total |
|---|---|---|---|---|---|---|
| Ocean freight $1,400 | Weight (700 kg) | $2.00/kg | $200 | $900 | $300 | $1,400 |
| Marine insurance $100 | Purchase value | 1.00% | $20 | $60 | $20 | $100 |
| Customs duty $500 | Customs value | 5.00% | $100 | $300 | $100 | $500 |
| Brokerage, port, inland freight $600 | Units (1,000) | $0.60/unit | $120 | $180 | $300 | $600 |
| Allocated add-on | $440 | $1,440 | $720 | $2,600 |
Interpretation: freight follows weight because the carrier priced the container by weight; duty and insurance follow value because CBP and the insurer charged on value; flat per-shipment fees follow units. Each column sums exactly to its cost line, so the allocation is complete and nothing is left in suspense.
Table 3: Resulting landed cost per unit.
| SKU | Purchase value | Allocated add-on | Landed cost | Units | Landed cost per unit | Add-on uplift |
|---|---|---|---|---|---|---|
| A | $2,000 | $440 | $2,440 | 200 | $12.20 | 22.0% |
| B | $6,000 | $1,440 | $7,440 | 300 | $24.80 | 24.0% |
| C | $2,000 | $720 | $2,720 | 500 | $5.44 | 36.0% |
| Total | $10,000 | $2,600 | $12,600 | 1,000 | 26.0% |
Interpretation: uplift over invoice price ranges from 22% to 36% by SKU — a flat average markup assumption would misprice all three. The margin effect is concrete on SKU C: at a made-up $6.00 selling price, costing at the $4.00 invoice price shows a gross margin of $2.00 per unit (33.3%), while the $5.44 landed cost shows $0.56 per unit (9.3%) — $1,000 versus $280 of margin on the 500 units. A pricing decision made on the first number would be wrong. To see how those unit costs flow into the income statement, use the cost of goods sold formula walkthrough.
What journal entries record landed cost?
These accrual-basis entries assume a perpetual inventory system under US GAAP and the Table 1–3 figures. A “landed-cost clearing” account collects shipment charges until the allocation is run; cash-basis taxpayers using the small business exception in Publication 538 handle tax reporting differently and should confirm treatment with their tax advisor.
Table 4: Journal entries for the hypothetical shipment (USD).
| # | Event | Account | Debit | Credit |
|---|---|---|---|---|
| 1 | Goods received, supplier invoice | Inventory | $10,000 | |
| Accounts payable — supplier | $10,000 | |||
| 2 | Ocean freight billed | Landed-cost clearing | $1,400 | |
| Accounts payable — carrier | $1,400 | |||
| 3 | Marine insurance billed | Landed-cost clearing | $100 | |
| Accounts payable — insurer | $100 | |||
| 4 | Duty ($500) and brokerage/port fees ($300) paid | Landed-cost clearing | $800 | |
| Cash / Accounts payable — customs broker | $800 | |||
| 5 | Inland freight billed | Landed-cost clearing | $300 | |
| Accounts payable — carrier | $300 | |||
| 6 | Allocation run (Table 2) | Inventory | $2,600 | |
| Landed-cost clearing | $2,600 | |||
| 7 | All 500 units of SKU C sold at $6.00 | Accounts receivable | $3,000 | |
| Sales revenue | $3,000 | |||
| Cost of goods sold | $2,720 | |||
| Inventory | $2,720 |
Interpretation: after entry 6, the clearing account is zero and inventory carries the full $12,600; after entry 7, $2,720 of cost has moved to COGS and $9,880 remains in inventory ($2,440 + $7,440). Every debit equals its credit, and the clearing account forces freight and duty to be allocated, not dumped into an expense line.
How do you handle duty and freight variances after receipt?
You rarely know final freight and duty when goods arrive, so accrue estimates at receipt — using the HTS-based duty estimate and the freight quote — then true up when the actual invoices land. Continuing the example (made-up numbers): the broker’s final bill shows duty of $540 against the $500 estimate, a $40 variance. If 60% of the shipment’s units are still on hand when the bill arrives, add $24 (60% × $40) to inventory and $16 (40% × $40) to COGS: debit Inventory $24, debit COGS $16, credit Accounts payable $40. If the variance is immaterial, expensing it to COGS is a common, practical shortcut — apply a written materiality policy consistently. FASB’s interim-reporting guidance in ASU 2015-11 (amending Accounting Standards Codification (ASC) 270-10-45-6) similarly directs companies using standard-cost systems to treat purchase price variances consistently between interim and annual periods. Document every true-up so the next shipment’s estimate improves.
Landed-cost system checklist
Use this to set up or audit the process; for the software side, see our guide to inventory management systems for small businesses:
- HTS classification and expected duty rate on file for every imported SKU, reviewed when products change.
- Delivery terms on each purchase order, so you know which freight and insurance legs are yours to capitalize.
- Customs value, duty, MPF, and HMF captured per entry and tied to the shipment (entry summary and broker invoice).
- Estimated duty, freight, and fees accrued at receipt into a landed-cost clearing account, reconciled to zero each month.
- Documented allocation bases — weight or volume for freight, value for duty and insurance, units or value for flat fees — applied consistently across shipments.
- Variances trued up between inventory on hand and COGS under a written materiality policy.
- Landed unit cost reviewed against selling price per SKU at least quarterly.
- Entry documents (commercial invoice, packing list, freight bills, entry summary) retained and retrievable per shipment.
RFS applied this kind of product-costing discipline when standardizing multi-currency accounting, export documentation, and product-line cost tracking for a Miami manufacturer and exporter — a US client case, documented on our site.
FAQs
Is freight to customers part of landed cost?
No. Landed cost stops at your receiving dock. Outbound freight to customers is a selling expense — the inventory cost regulation for produced goods makes the same boundary, excluding “any cost of selling” from inventory cost (26 CFR § 1.471-3(c)).
Which allocation basis should I use?
Match the driver the charge was priced on: weight or volume for freight, customs value for duty and cargo insurance, units or value for flat per-shipment fees. Any reasonable, consistently applied basis is generally acceptable for management and book purposes; inconsistency between shipments is what distorts margins.
Can I just expense freight and duty instead of capitalizing them?
Not under US GAAP if the amounts are material — they are part of inventory cost. For federal tax, businesses that must account for inventories follow the Section 471 cost rules, and larger ones also apply Section 263A; qualifying small business taxpayers under the Section 448(c) gross receipts test may be excepted from the inventory requirement altogether (see Publication 538). Expensing for convenience while claiming accurate SKU margins is the one combination that does not work.
Does landed cost apply if I am a cash-basis taxpayer?
Cash basis is a tax method; it does not change what your inventory cost is for pricing and management. Even a cash-basis seller needs landed unit costs to know whether products are priced profitably. Confirm with your tax advisor how your business reports inventory for tax, because the small business exceptions change the answer.
The bottom line
Pick one shipment this month and cost it fully: pull the supplier invoice, freight bill, insurance, entry summary with duty and fees, and inland delivery; allocate each charge across SKUs by driver; post the clearing-account entries; and recompute the margin on each SKU at landed cost. If the margins move — they usually do — update your prices from the landed numbers, not the invoice numbers. If you want an experienced team to validate your landed-cost allocation, duty accruals, and journal entries before you trust the margins, our remote bookkeeping services can review the setup, and the Industry Finance Guides hub covers the surrounding inventory and costing topics.
This article is general educational information, not tax, legal, customs, or accounting advice. Duty rates, fees, and tax thresholds change, and the right treatment depends on your products, terms of sale, and entity facts; consult a qualified customs broker, CPA, or tax advisor about your specific shipments before acting.