Is Freight In Included In Cost Of Goods Sold?
As a procurement professional or business owner, understanding the cost of goods sold (COGS) is essential to running a profitable operation. However, when it comes to factoring in additional expenses such as freight-in, things can get tricky. Is freight included in COGS? The answer is not so straightforward but fear not! In this blog post, we will delve into the intricacies of calculating COGS with freight-in and explore the pros and cons of including it in your calculations. So grab your calculator and let’s get started!
What is Cost of Goods Sold (COGS)?
Cost of Goods Sold (COGS) is a crucial metric that measures the direct costs associated with producing and delivering goods. It includes all expenses incurred in creating the product, such as materials, labor, and overheads.
COGS represents the cost of producing or acquiring inventory items that are later sold to customers. These costs are different from indirect expenses like marketing, rent, taxes or salaries that don’t directly contribute to the production process.
Calculating your COGS accurately is critical for determining your business’s gross margin – which helps you understand how profitable your products are after taking into account all direct costs associated with their production.
In essence, COGS reveals how much it truly costs you to produce each unit of inventory sold – this information can help you make more informed pricing decisions while keeping a close eye on profitability targets.
What is Freight-In?
Freight-In refers to the cost of shipping and delivery of goods purchased by a business. This cost is typically incurred when purchasing inventory or raw materials from suppliers. Freight-In expenses can include various charges such as shipping fees, customs duties, handling charges, insurance premiums, and other related costs.
The transportation expenses that are paid by businesses to move products from suppliers’ warehouses to their premises are known as freight-in costs. The supplier’s invoice may indicate these prices separately as transport or postage. It might be more difficult for small companies with limited resources to calculate their actual COGS because they must figure out how much they spent on freight-in.
In general, freight-in is considered an essential component of a company’s overall cost of goods sold (COGS) since it directly impacts the total expense associated with acquiring inventory or raw materials. Therefore, accurately accounting for this expense plays a crucial role in determining the profitability of each sale made by any given company.
Businesses need to keep track of all their expenses related to freight-in so that they have an accurate representation of what it actually costs them to bring products into their warehouse/acquire raw materials while calculating COGS properly; otherwise, they risk underreporting earnings and overstating profits!
How to Calculate COGS with Freight-In
To calculate COGS with Freight-In, you’ll need to know the cost of goods purchased and the total freight-in costs incurred. The first step is to determine the cost of the items that were purchased for resale or production during a specific period. This figure should include all expenses directly related to acquiring these goods such as purchase price, taxes and tariffs.
Next, add up all your freight-in costs associated with shipping those items from their point of origin to your warehouse or production facility. These could include transportation fees, insurance charges or any other applicable charges related to getting those goods delivered.
Once you have both figures calculated separately, simply add them together. That’s how much it costs you to get each item into inventory or ready for production – this sum represents your Cost Of Goods Sold (COGS) including Freight-In expenses.
Remember that calculating COGS accurately is important because it can impact your profit margins and help guide pricing decisions. Keeping track of freight-in expenses will allow for more accurate accounting records and informed procurement strategies in line with company goals.
Pros and Cons of Including Freight-In in COGS
Including freight-in costs in the calculation of Cost of Goods Sold (COGS) can have its advantages and disadvantages. Here are some pros and cons to consider:
Pros:
Firstly, incorporating freight-in costs into COGS provides a more accurate measure of how much it cost to produce or purchase goods sold. This allows for better financial analysis and decision-making.
Secondly, including freight-in in COGS helps ensure that all expenses associated with getting inventory to the warehouse or production line are accounted for. This way, businesses can determine their true profitability on each product or service they offer.
Cons:
One potential downside is that adding freight-in costs may inflate the value of inventory on hand. As a result, this could lead to higher taxes paid by businesses as well as lower net profits recorded.
Another possible disadvantage is that including these transportation expenses may make it harder for small businesses and startups to compete with larger companies who have greater negotiating power when it comes to shipping rates.
Weighing the pros and cons will ultimately depend on specific business needs and goals – but considering these factors should help make an informed decision about whether or not freight-in should be included in calculating COGS.
Conclusion
Understanding Cost of Goods Sold (COGS) and Freight-In is essential for any business that deals with physical products. Including the cost of freight in your COGS can help provide a more accurate picture of your true product costs, which can ultimately impact pricing decisions and profit margins.
However, there are also potential drawbacks to including freight-in in your COGS calculation. It can be difficult to accurately determine the exact cost of shipping for each individual item, especially if you ship large quantities at once or use third-party logistics providers.
Ultimately, whether or not to include freight-in in COGS is a decision that should be made on a case-by-case basis depending on factors such as industry norms, company policies, and accounting regulations.
By taking the time to understand how COGS and Freight-In work together and carefully considering the pros and cons before making any changes to your accounting practices will ensure that you make informed decisions about how best to manage this important aspect of procurement.