Freight In vs Freight Out: Understanding Key Differences in Shipping Costs

Freight in and freight out are integral concepts in supply chain management, impacting various aspects of a business’s operations. As supply chain management evolves, the efficient management of freight in and freight out will remain a key factor in achieving business success and maintaining a competitive edge. Freight out refers to the cost of transporting goods from the seller’s location to the buyer’s location. It includes all expenses that the seller incurs in shipping their products to the customer. Freight in refers to the cost of transporting raw materials to the business, while freight out refers to the cost of shipping finished goods to customers.

If you belong to the freight industry, chances are you might’ve encountered some new accounting expenses and jargon that you wouldn’t find in other sectors. When each Freight In and Freight Out are well-managed, it is like having one of the best present on the town, and it even helps handle these tough freight forwarding costs. The Freight Out process begins with the careful selection and preparation of goods for shipping. This includes activities such as packing, labeling, and assembling items into bundles or pallets suitable for transport. The choice of transport mode—whether it’s road, rail, air, or sea—is a critical decision that depends on factors like the nature of the goods, urgency, and cost considerations.

This increase in shipping costs impacted many businesses, including retailers, who rely on shipping to deliver their products to customers. One example was the backlog of shipping containers built up in ports worldwide, leading to delays and higher costs for businesses that rely on shipping. As a result, many companies raise their prices or absorb the higher shipping costs themselves, which impacts their profitability. The cost of the finished goods sold, including the $500 freight fee, would be reflected in the inventory records after they have been updated. The $500 freight charge would then be shown as a selling expense on the income statement by the accountant.

LIFO vs FIFO Method

Understanding these differences is essential for effective supply chain management. This difference can cause confusion between inventory tracking and inventory valuation, since reported costs do not always match actual stock flow. To handle this, firms use a LIFO reserve—an accounting adjustment that shows the difference between LIFO and FIFO inventory valuations. The LIFO reserve is essential for financial reporting purposes and tax reporting, as it provides transparency for both investors and tax authorities.

Yes, freight in costs should be added to inventory value until goods are sold. Hometown Books is a chain of retail book stores that orders a large shipment from HMS, Inc. The contract states that Hometown Books will pay the costs to transport the books from the HMS factory to the book stores throughout Ohio. In this exchange, Hometown Books considers this transaction freight in because they paid freight costs as the buyer of goods. Freight Out raises operating expenses (SG&A) on the income statement, which lowers net income.

• LIFO ranks among the common inventory valuation methods businesses use to manage inventory costs and report on financial statements.
• If Hometown Books pays for shipping the books from HMS’s factory to its stores, this transaction is considered freight in for Hometown Books.
• Typically there is an expense account in the Cost of Sales section of your Profit and Loss Statement for shipping and it is used in this situation.
• The LIFO method—Last In, First Out—assigns the cost of the most recent purchases to the cost of goods sold, often reducing taxable income when prices rise.
• They provide valuable insights into the direction and purpose of freight transportation, thereby influencing strategic decision-making in logistics management.

Eventually, recording them in the right manner paves the way for managers to make accurate financial projections and sound business decisions. Companies must stay agile, frequently reviewing and adjusting their pricing and shipping strategies to adapt to these changes. Utilizing dynamic pricing models can help mitigate some of these challenges by allowing businesses to adjust prices in real-time based on current shipping costs and market conditions. Platforms like ShipStation or ShipBob offer integrated solutions shipping expenses accounting that automatically track and allocate shipping costs, providing real-time data and analytics. These tools can streamline the process, reducing the likelihood of errors and saving valuable time.

Businesses using the LIFO method often operate where rising costs and high inventory turnover make an accurate cost of goods sold essential. LIFO reverses this by assigning the latest inventory costs to goods sold, which lowers taxable income when prices increase. FIFO typically shows higher gross profit, while LIFO reduces net income but offers tax advantages in inflationary periods. During periods of inflation, the LIFO method assigns a higher cost to inventory goods sold first.

Freight accounting offers opportunities for your company to save money by noticing areas where you may be able to modify or negotiate costs or otherwise switch modes or carriers. It may also show you ways to operate more efficiently, which can, in turn, save money. If the freight classification is FOB shipping point, the buyer takes responsibility for the cost of transporting the goods. The company ships its products to customers nationwide using various shipping carriers.

In one month, Amacon sends 500 devices to customers at a total cost of $10,000. The company records this cost as Freight Out and allocates it to individual customer orders. Amacon charges customers a flat rate of $20 for shipping, which covers the cost of freight out and provides a small profit margin.

Freight In vs. Freight Out: Navigating Shipping Dynamics

• Businesses see lower profits but benefit from reflecting current costs more accurately in their financial reporting.
• Businesses account for these costs differently depending on whether the buyer or seller pays for the shipping and whether shipping fees are included in the cost of the items.
• Businesses should follow these five steps to accurately account for the costs of freight out within their records.

Though LIFO typically results in reduced taxable income, businesses must weigh its benefits against the impacts on financial reporting and compliance. For companies that ship goods on a regular basis, freight expenses are an inevitable and significant expense. Knowing the costs in detail and how to handle them can improve a business’s bottom line.

Who is Responsible for Freight Out Costs?

In these cases, the seller covers the cost of the goods and transportation to a designated port while the buyer manages further shipment and related expenses. 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. And there you have it – a handful of best practices to help you master freight cost management. Implement these strategies, and you’ll be well on your way to a more profitable and efficient operation.

Is Freight-In Included in Cost of Goods Sold?

Depending on the conditions set forth by the buyer and seller, one party may be responsible for paying the freight in or out. The buyer often covers freight out, whereas the seller typically covers freight in. Nevertheless, depending on the particulars of each transaction, this may change. Understanding freight in vs freight out who is responsible for these freight services is crucial for accurate financial planning. The average cost method smooths out price fluctuations by calculating an average cost for all units available during an accounting period. This approach balances cost variations, providing a consistent basis for valuing inventory and calculating cost of goods sold.

In what ways do ‘freight in’ and ‘freight out’ influence a company’s financial statements?

Besides the accounting entries mentioned above, freight-in and freight-out charges can feature in other accounting systems. In such cases, you indicate at the time of the sale that the customer will pay for the transportation of their purchase from your premises to their preferred address. Freight-out expenses fall under SG&A (Selling, General, and Administrative) costs. The billings to customers should only be treated as revenue when doing so is the primary revenue-generating activity.

These cost savings can be reinvested into other areas of the business, driving growth and innovation. By optimizing freight in and freight out processes, businesses can enhance operational efficiency. This includes reducing lead times, minimizing transportation costs, and improving inventory turnover. Efficient freight management allows businesses to respond quickly to market demands and adapt to changing conditions. This adjustment can also impact the ending inventory value reported on the balance sheet. In some cases, a higher LIFO reserve can result in a higher ending inventory value if inventory levels are reduced and older, lower-cost inventory is sold.

The point of transfer is when the goods reach the buyer’s place of business. Delivery Expense increases (debit) and Cash decreases (credit) for the shipping cost amount of $100. On the income statement, this $100 delivery expense will be grouped with Selling and Administrative expenses. When you buy merchandise online, shipping charges are usually one of the negotiated terms of the sale. Freight In operations are typically managed by skilled logistics personnel who ensure that the process is efficient, accurate, and compliant with safety regulations.

The smooth execution of these operations is critical, as it directly impacts the availability of goods for sale or further processing, affecting the overall supply chain’s performance. For the seller, freight out is considered a selling expense and is not included in the cost of goods sold (COGS). This categorization reflects that freight out is not directly related to the production or purchase of the goods but is an additional cost incurred in delivering them to the customer.

It is important to follow generally accepted accounting principles to ensure that these costs are accurately recorded and reported. Both Freight In and Freight Out have a significant impact on supply chain efficiency. Efficient Freight In processes ensure that goods are promptly available for sale or further processing, minimizing lead times and reducing the risk of stockouts. Similarly, effective Freight Out management ensures timely deliveries, reduces transportation costs, and enhances customer satisfaction.