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Should freight-out be considered COGS or Selling Expense?

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
Title: Bookkeeper
Company: MHR
(Bookkeeper, MHR) |

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.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

As you describe it, the freight out is a selling expense, not a cost of the goods. COGS includes the costs incurred in getting the goods converted/purchased/manufactured to the point that they can be sold. Distributing the goods to your customers is a selling expense and will likely vary based on delivery distance/mode.
Measure gross margin both before and after deducting freight out to assess the impact of the freight cost on your margins.

John Baker
Title: Principle
Company: Cost Systems Specialist Consulting
(Principle, Cost Systems Specialist Consulting) |

Freight and similar costs/expenses are either inventorial or expenses. How you determine this classification depends on what the activity is associated with. Inventory costs are simple - it's incurred as product is moved along during purchasing, manufacturing, and stocking. Shipping incurred during selling product can be a separate line item included as part of the COGS but not an inventory cost from the make/shelf process.
On the other hand, shipping out the door can also be a sales expense - IF your sales people have jurisdiction on selecting the mode and negotiating rates.
If your traffic department (Traffic Manager) is responsible and answerable to sales, then it's a slam-dunk, expense it to sales. If on the other hand your Traffic Manager/Shipping is responsible and accountable to your Plant Manager, then include "freight out" as a separate line item on your COGS sheet.

D M
Title: accounting manager
Company: SaaS
(accounting manager, SaaS) |

In your case, looks like an expense.

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