“Freight in” is a term used in accounting to refer to the transportation cost associated with the delivery of goods from a supplier to the purchasing company. When a company buys goods, it may incur costs to have those goods delivered to its premises. These costs, whether they are for delivery by road, rail, air, or sea, are referred to as “freight in” costs.
Freight in is considered a part of the cost of goods sold (COGS) and is recorded in the company’s books when the goods are received. This means that when the company sells its inventory, the freight-in cost will be part of the expense recognized along with the cost of the inventory items themselves.
For example, if a company purchases raw materials for $10,000 and pays $500 for the shipping, the total cost of the inventory is $10,500. This total cost is used when calculating the cost of goods sold as the inventory is sold.
It’s important to note that “freight in” is different from “freight out”. Freight out, also known as delivery expense, is the cost of transporting goods to customers, and it’s typically treated as a selling expense rather than a part of the cost of goods sold.
Example of Freight In
Let’s say we have a furniture manufacturing company called “Comfort Creations.” They buy raw materials like wood, fabric, and metal from various suppliers to produce their furniture.
One day, they place an order for $50,000 worth of high-quality wood from a supplier. The supplier charges them $2,000 to deliver the wood to their manufacturing facility. This transportation cost is known as “freight in.”
So, in their accounting books, Comfort Creations records the cost of the wood as follows:
- Inventory (raw materials): $50,000
- Freight In: $2,000
- Total cost of the inventory: $52,000
This $52,000 will be considered the cost of the inventory. When Comfort Creations uses the wood to produce furniture and sells the finished goods, the cost of goods sold (COGS) will include the $52,000 (assuming all the wood was used).
This example illustrates how “freight in” costs are included as part of the inventory costs and subsequently reflected in the cost of goods sold.