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Freight in vs freight out: When goods are shipped between suppliers and customers, freight charges are incurred from the freight services and must be expensed using the correct methodology, to remain consistent Generally Accepted Accounting Principles. There are different classifications for freight out and freight in, let's find out more.
What is freight in?
Freight-in represents the cost of obtaining goods from a supplier. This obviously includes transportation and shipping costs, but could also include handling and brokerage fees, customs charges, and so forth, as long as you do not need to those recording freight as expenses in separate accounts. For typical accounting purposes, freight-in is added into the cost of goods, just as though the supplier charged a higher price. Examples may include the cost of shipping raw materials from a supplier to your factory or transportation fees for bringing in finished goods from a manufacturer.
Definition of freight out
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). Examples may include the expense of sending finished products to a retailer or transportation fees for delivering your product directly to a customer.
Key differences between freight in and freight out
Freight in refers to the cost of shipping goods received by a business. This could be raw materials for a manufacturer or finished goods for a retailer. The buyer is responsible for this cost. On the other hand, freight out represents the cost of shipping goods shipped by a business to their customers. The seller is responsible for these costs.
Understanding these differences helps businesses accurately track shipping costs and make informed decisions. For example, a company considering FOB shipping point vs. FOB destination needs to know which one party bears the freight cost.
Freight in can impact inventory valuation on the balance sheet. Freight out directly affects the company's profit margin by increasing selling expense.
Direction of transport
Freight in refers to costs incurred by a business for shipping raw materials or goods into their storage facility or production area. It's a direct cost associated with the company's daily operations. Since it's part of getting goods ready for sale, freight in is considered an inventory cost. Recording freight is typically placed in the inventory records and becomes part of the cost of goods sold when the finished product is sold.
Freight out represents costs of shipping finished goods to customers. The responsibility for freight charges can vary depending on the sales agreement. Incoterms like FOB shipping point indicate the seller's responsibility ends at the origin, while FOB destination means the seller covers costs until the goods reach the buyer. Freight out is considered a selling expense and is not included in the cost of goods sold. It's expensed in the period it's incurred, impacting the income statement.
Ownership and Responsibility
Speaking about freight in, the buyer is typically responsible for the freight in cost. This means the cost is incurred by the company receiving the goods. While in freight out, depending on the sales agreement, either the seller or the buyer might be responsible for freight out. Common incoterms like FOB shipping point place the responsibility on the buyer after the goods are loaded, while FOB destination makes the seller responsible for delivery.
Documentation
Since freight in is considered a direct cost associated with acquiring inventory, it's usually added to the cost of the goods. This cost is then reflected in the inventory records and ultimately becomes part of the cost of goods sold on the income statement when the inventory is sold.
Freight out is generally treated as a selling expense on the income statement. This means it's recorded as a cost incurred in the period the sale is made, not when the customer pays.
How to record freight in and freight out?
When freight-in charges are billed by and paid to different suppliers than inventory item(s), separate payment forms or purchase invoices are required. After all, you cannot record amounts paid to one entity on a transaction form for another. Examples include:
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Direct billing by freight companies
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Separate invoices from freight forwarders
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Fees from brokers
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Customs charges
For these situations, both manual allocation and automatic distribution are available. Manual allocation can be used in all cases. Automatic distribution can be used under limited circumstances and includes drawbacks some users (or their accountants or auditors) may not like.
Freight cost optimization
Freight optimization is the process of examining your freight shipping to ensure that it is being conducted in the most efficient and cost-effective manner. For example, you may take a close look at your charges and realize that your carrier needs more advance notice for your shipments. This could save you money because your carrier can then plan ahead and reduce their costs, then pass those savings on to you. Your carrier could include planning for backhauls, where the truck can pick up a new load as they deliver your freight, or plan for something as simple as reducing idle times while waiting to pick up, load, or deliver freight.
Mode selection
Businesses can significantly impact their bottom line by optimizing freight costs through strategic mode selection. Choosing the right shipping option, like truck, rail, or air, can significantly affect freight out expenses. Factors to consider include:
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Distance: For long distances, ships might be cheaper despite slower speeds.
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Urgency: Time-sensitive shipments might benefit from faster (but pricier) air freight.
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Goods type: Fragile items might require special handling, impacting costs.
Route optimization
Optimizing routes is a time-consuming, precise task requiring smart planning and a wealth of data points. Yet our survey found that 72% of the 11,246 businesses we talked to didn’t use route optimization software. Manual route planning is possible when your routes don’t change much from day to day and your operations are small, but is it as accurate as advanced, real-time algorithms?
You can map out the distance from one stop to the next and account for mileage between each segment. If you know the area well, you may even choose back streets that are less congested but have lower speed limits because you know that you’ll reach your destination faster.
But truly efficient route planning must consider:
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Delivery objectives;
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Existing delivery data;
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Average vehicle type;
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Standard traffic conditions;
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Speed limit;
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Distance between stops;
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Overlapping routes;
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Delivery constraints.
Dynamic route optimization helps keep travel time to a minimum and provides immediate cost savings. Algorithms can systematically update delivery time windows, traffic congestion, and the best route based on dozens of factors.
Consolidation
Consolidation is a key strategy for optimizing freight costs. It involves combining multiple smaller shipments into a larger one, maximizing space utilization in trucks or containers. This leads to lower per-unit freight charges as businesses pay less per item shipped. Also, fewer trucks are needed, saving on fuel and transportation costs.
Benefits from the consolidation are improved profitability for businesses and more efficient use of resources by shipping companies.
Looking for cost optimization or a freight company? Contact AsstrA experts
Rising freight costs can significantly impact your business's bottom line. These costs directly affect your income statement, a key financial statement that reflects your company's profitability.
There are ways to save money on shipping: AsstrA's freight specialists can help you optimize your shipping strategy by understanding incoterms like FOB shipping point and FOB destination clarifies who is responsible for shipping costs; choosing the right shipping method for your needs, such as air freight, ocean freight, or ground transportation, can significantly impact costs; combining smaller shipments into larger ones can often lead to lower freight rates. AsstrA can help you consolidate shipments to save on costs.
By optimizing your shipping strategy with AsstrA, you can:
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Reduce delivery expenses;
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Improve profit margins;
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Boost sales department efficiency.
Contact AsstrA today for a consultation and discover how we can help you save money on shipping and boost your profits!