Transportation-in costs, which are also known as freight-in costs, are part of the cost of goods purchased. The reason is that accountants define "cost" as all costs necessary to get an asset in place and ready for use. Show If a company purchases goods with terms such as FOB shipping point, the company will be responsible for any costs to get the products from the seller to the company's warehouse. In that situation, the company using the periodic system will likely have a purchases account entitled Transportation-in or Freight-in. (If goods are purchased with terms of FOB destination, the buyer will not have a separate transportation-in cost, because the seller is responsible for the costs of getting the goods to the buyer's location.) Transportation-in costs should be allocated or assigned to the products purchased. Therefore, the unsold products in inventory should include a portion of the transportation-in costs. The products that have been sold, should have their share of the transportation-in costs in the cost of goods sold). Example of Transportation-in CostsLet's assume that a bookstore purchases 20 copies of a bestselling book for $20 each and the terms are FOB shipping point. The shipping cost to get the books from the publisher to the bookstore amounts to $40. Therefore, this transportation-in cost of $40 amounts to $2 per book, resulting in a cost per book of $22. If 16 books are sold, the cost of goods sold will be $352 (16 X $22) and the inventory cost of the remaining 4 books will be $88 (4 X $22). In total, the bookstore had purchases of $400 + transportation-in cost of $40, resulting in the cost of goods available of $440. When we subtract the $88 cost of inventory, there is $352 as the cost of goods sold. The shipping cost to be paid by the buyer of merchandise purchased when the terms are FOB shipping point. Freight-in is considered to be part of the cost of the merchandise and should be included in inventory if the merchandise has not been sold. Our manufacturing company pays freight-out to logistics providers to ship products from our warehouses to customers. We do not charge freight-out in our customer invoices. From what I understand, COGS consists of inventoriable costs that are considered to be necessary to produce and prepare goods for sale, so it seems like freight-out should be considered Selling Expense instead of COGS. However, I've seen other companies include freight-out in COGS and there are people in our company who believe that is the correct approach. What do you think? Answers Sharon Binau Bookkeeper • December 18, 2018 If the freight can be attributed directly to a customer or a job, then it's a COGS. In your case, it sounds like it's more of an expense because you are not the one shipping it directly to the customer. That's my take on it. Freight out is the transportation cost associated with the delivery of goods from a supplier to its customers. This cost should be charged to expense as incurred and recorded within the cost of goods sold classification on the income statement. Freight out is not an operating expense, since the supplier only incurs this cost when it sells goods to a customer (rather than incurring it as part of day-to-day company operating activities). Freight-out billings to customers should only be treated as revenue when doing so is the primary revenue-generating activity of the shipping entity. In this situation, freight revenue should be recorded in a separate revenue account, so that management can clearly see how much revenue is being generated by this activity. And, since freight revenue is being separately recorded, then so too should the associated freight expense. Doing so makes it easier to determine the amount of profit generated by these freight billings. In some cases, the amount of unreimbursed freight out is so small that the balance in the freight out account is aggregated into the "other cost of goods sold" line item in the income statement. Freight Out in Profit AnalysisIf a profitability analysis by customer is developed, the cost of freight out should be included, since this can sometimes result in a significant reduction in profits by customer. This is especially the case when deliveries are being made over long distances, on a rush basis, or when the delivered goods are bulky. In this podcast episode, we discuss the accounting issues related to freight in and freight out. Key points made are noted below. Accounting for Freight InLet’s start with freight in. This is the shipping and handling cost of bringing goods into a company. There’re a couple ways to deal with it. You’re allowed to include it in the cost of inventory. If you follow that path, some freight in cost may end up being capitalized into the month-end inventory. That means it won’t appear in the cost of goods sold until the related inventory items are eventually sold. That could work if you want to delay expense recognition. Another option is to charge it straight to expense as incurred. This works pretty well if the amount of freight in is relatively small, and it reduces the amount of work involved in figuring out how much freight cost is included in the ending inventory balance. On the other hand, this could result in charging a bit more to expense up front than would otherwise be the case. I come down pretty hard in favor of charging off freight in right away. Yes, it accelerates expense recognition a bit, but for most companies, the amount of expense involved is pretty small. The main reason for an immediate charge off is to keep freight in from mucking up the inventory records. It’s just one more item that gets loaded into the bill of materials or allocated through overhead, and one more item that the auditors need to be aware of when they examine the year-end inventory balance. And on top of that, you have to factor freight costs back out when doing a lower of cost or market analysis. So, in short, I suggest charging freight in to expense as soon as you receive the invoice from the freight company. But. There is one case where you might not want to do that, and that would be in a business with seasonal sales. Let’s say you produce goods all year long, but only sell them during a high season, like during the summer or the winter holidays. If you were charging freight to expense all through the year, you’d have these odd looking financial statements that have a small amount of cost of goods sold in every month, but no offsetting sales, because sales only occur during the prime selling season. In this case, you might have to capitalize the freight in cost, just to avoid questions from investors and lenders about why there’s this weird expense showing up in the income statement. Accounting for Freight OutAnd then there’s freight out. This is the shipping and handling cost required to deliver goods to customers. And, as was the case with freight in, there’re a couple of ways to account for it. The basic method is to charge freight out to expense as soon as you incur the cost. A possible issue here is the timing of the recognition. Under the matching principle, all costs associated with a sale are supposed to be recognized in the same period as the sale. But, with freight out, you may not receive an invoice from the freight company until the next month, which means that the expense recognition is incorrectly delayed. Given the amount of expense involved, a lot of companies don’t bother to accrue the expense in the correct period. They just wait for the freight invoice to arrive, and record it in whatever period that happens to be. I would say that accruing freight out in the proper period is more of a pain than it’s worth. You’d need to match up every shipment with every freight billing to see which shipments haven’t yet been invoiced by the shipping company, and estimate what the invoice should be, and then create an accrual. And to make the decision even easier, I’ve never heard of an audit firm that forces its clients to accrue for unrecorded freight out. Another issue with freight out is what to do if you re-bill the freight charge to the customer. The choices are to either treat the billing as a form of revenue, or to offset the billing against the freight out expense. Freight out billings to customers should only be treated as revenue if doing so is the primary revenue-generating activity of the business. It seems like a strange business model if that’s how a company turns a profit. Instead, you would normally offset freight billings to customers against the freight out expense line item. This should result in a pretty small freight out expense. There may even be cases where the freight out expense is negative, if the amount billed is routinely higher than the amount of the expense. If so, that’s fine. Another issue is where to report both types of freight expense in the income statement. Both should definitely be in the cost of goods sold. I’ve heard an argument that the cost of freight out should be listed in the sales department, but that just makes no sense. Freight is clearly a direct cost that’s associated with a product sale, so it has to be in the cost of goods sold. It doesn’t relate to the daily operations of the business, and so it shouldn’t be included in the sales department, or for that matter in the general and administrative area. What type of expense is freightUsually, freight expenses are recorded as other “general expenses.” How the cost is recorded may depend on who is paying the freight cost and whether the cost is included in the asset's value/price.
Is freightFreight is clearly a direct cost that's associated with a product sale, so it has to be in the cost of goods sold. It doesn't relate to the daily operations of the business, and so it shouldn't be included in the sales department, or for that matter in the general and administrative area.
Is shipping expense a selling expense?Selling expenses can include: Distribution costs such as logistics, shipping and insurance costs.
Is freight part of cost of sales?Freight out shipping costs have a direct relation to the number of goods you sell, so they're categorized as a cost of goods sold. To record this, calculate your freight costs under the costs of goods sold section in your income statement.
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