The sixty-second answer
Landed cost is what an item really cost you once it is on your shelf and ready to sell. Build it from four parts: the supplier price, duties and any tax you cannot recover, shipping to your door, and local stocking costs. Spread shared charges across the shipment by value or by quantity, then price from that figure.
Why the invoice price is not the cost
Most small retailers and trades price from the supplier invoice. It is the number in front of them, it is easy to find, and it is wrong in a consistent direction. Everything that happened between the supplier's warehouse and your shelf also cost money, and that money has to be recovered from the same sale.
The accounting standard for inventory states the principle plainly. The cost of inventory includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventory to its present location and condition [5]. A box sitting in a supplier's warehouse in another country and the same box on your shelf in Moncton are not the same asset. The second one has freight, duty and handling built into it.
The tax rules land in a similar place. For computing business income, inventory is valued at the end of the year at the lower of what it cost you and its fair market value [6]. That makes cost the starting number for your year-end inventory figure, which in turn drives cost of goods sold and taxable income. Getting cost right is not a pricing nicety. It flows straight through to the return.
The four parts of landed cost
A practical way to build landed cost is to break every receipt into four buckets. Each one answers a different question, and keeping them separate makes the result easy to check.
1. Actual cost. What the supplier charged for the goods themselves, after any trade discount on the invoice. This is the part people already capture.
2. Taxes and duties. Customs duty on imported goods, and any sales tax you cannot get back. Recoverable GST/HST is a different matter and is covered below, because it does not belong in this bucket for most registered businesses.
3. Shipping. Freight, courier, brokerage and insurance charges to get the goods from the supplier to your door. This often arrives on a separate bill from a separate company, days or weeks after the goods.
4. Local stocking costs. Costs incurred after arrival but before the item is ready to sell: unpacking, relabelling, a local delivery from the depot to your store. The line to draw is the one IAS 2 draws: was the cost needed to bring the goods to their present location and condition [5]? General warehouse rent after the goods are shelved, advertising and selling costs do not qualify.
Where customs value fits in
If you import, you will meet a second cost figure that is easy to confuse with landed cost: value for duty. It is the customs number the CBSA uses to calculate duty, and it has its own rules.
Under the Customs Act the starting point is the transaction value, based on the price paid or payable for goods sold for export to a purchaser in Canada [1]. Certain costs are then added, including transportation, loading, unloading, handling and insurance up to the place from which the goods are shipped directly to Canada [1]. The CBSA's memorandum on transportation costs spells out the split: freight paid by the purchaser to get goods to the place of direct shipment is added to value for duty, while freight from the place of direct shipment to Canada is not included [2].
Duty and GST on commercial imports are assessed and collected through the CBSA Assessment and Revenue Management system, known as CARM, which importers use through the CARM Client Portal [3]. The GST on an import is then calculated on a value that includes the value for duty plus the duties payable [4]. That is worth knowing because it means the duty itself is part of the base for the tax.
None of this changes what landed cost is. Value for duty is a customs calculation. Landed cost is your own figure, and it includes the duty that was calculated from value for duty, plus the freight into Canada that customs leaves out.
What about GST/HST?
If you are a GST/HST registrant and you buy stock for resale, the GST/HST you pay on it normally comes back to you as an input tax credit. Putting that tax into landed cost would overstate the item's cost, understate your margin, and double-count the tax when the credit arrives. The usual practice is to keep recoverable GST/HST out of inventory cost entirely.
Tax you cannot recover is different. A business that is not registered, or tax that is not recoverable for another reason, is a real cost of the goods and belongs in the taxes and duties bucket.
Spreading shared costs: by value or by quantity
The hard part of landed cost is rarely the arithmetic for one item. It is the freight bill that covers a whole shipment of mixed products. A single courier charge for a box containing ten phone cases and two tablets has to be split somehow, and the method you choose changes the answer.
By value. Each line takes a share of the shared cost in proportion to its share of the shipment's total price. If the tablets are ninety percent of the value, they carry ninety percent of the freight. This suits shipments where cost tracks value, such as insured goods, customs duty charged as a percentage, or a mix where the expensive items are also the bulky ones.
By quantity. Each unit takes an equal share, regardless of price. Ten phone cases and two tablets means twelve units, each carrying one twelfth of the freight. This suits shipments of similar items where every unit took roughly the same space and weight.
Neither is correct in the abstract. Pick the one that reflects why the cost was incurred, apply it consistently to similar shipments, and write the choice down. What causes trouble is switching methods from one receipt to the next without a reason, because the same product then shows a different cost every time it is reordered.
A worked example, without the prices
Consider a shipment of two products from one supplier. Product A is small and inexpensive, and you bought a hundred of them. Product B is large and expensive, and you bought five. The freight company charges one amount for the whole pallet, and customs charges duty as a percentage of value.
Duty follows value by its nature, so it is spread by value. Almost all of it lands on Product B. The freight is a judgment call. If Product B took up most of the pallet, spreading freight by value gives a reasonable answer. If the hundred units of Product A took up most of the space, spreading by quantity is closer to the truth. Either way, divide each product's share of the shared costs by its unit count and add that to the supplier's unit price. The result is the per-unit landed cost you price from.
The point of the example is that the choice matters more for the cheap item than for the expensive one. A few cents of freight on a product with a thin margin can be the difference between profit and loss.
Averaging across reorders
You will buy the same product again, at a different price, with a different freight bill. The inventory standard allows interchangeable items to be costed on a first-in, first-out basis or with a weighted average cost formula [5]. For most small businesses that do not track individual serial numbers, weighted average is the simpler of the two: each new receipt blends into the existing average cost of the units on hand.
Whatever method you use, apply it to landed cost, not supplier price. Averaging supplier prices and then adding a rough freight percentage at the end reintroduces the error you were trying to remove.
Where businesses usually go wrong
The most common mistake is recording freight as a general operating expense instead of attaching it to the goods it brought in. The expense line looks tidy, but every product in the store then carries a cost that is too low, and gross margin reports overstate profit on exactly the lines with the heaviest shipping.
The second is the late freight bill. The goods arrive, get shelved and start selling. The freight invoice arrives two weeks later from a different company and is filed as a stand-alone expense because nobody connects it to the shipment. Keeping a receipt open until all of its costs are in, or being able to add a cost to a receipt after the fact, solves this.
The third is including recoverable GST/HST in cost, which inflates every figure and then gets reversed at filing time, usually by someone other than the person who set the price.
How MapleInventory handles it
MapleInventory builds landed cost from the purchases you already file. Receipts and bills entered in MapleExpense under resale or asset GIFI codes land in a MapleInventory receiving queue. Maple-AI sorts each line into resale stock, company asset, freight or duty, or ignore, so a courier line on a supplier invoice is recognised as a shipping cost rather than a product.
Each receipt is broken into the same four parts described above: actual cost, taxes and duties, shipping, and local stocking costs. Shared charges are spread across the lines by value or by quantity, your choice. Recoverable GST/HST is kept out of cost by default, because it comes back to you as an input tax credit. Stock is then valued at weighted-average landed cost, and when you set a retail price, MapleInventory can suggest one from a target margin you set, calculated on landed cost rather than the invoice price.
The result is that the margin you see on a product is the margin you actually earn on it, which is the number you need when you decide what to reorder.