Definition
Freight out, also referred to as transportation-out, is an accounting and finance term that refers to the costs of shipping merchandise from the seller to the buyer. These costs are typically incurred by the seller and often recognized as a selling expense. As such, they are recorded separately from the stock inventory on the seller’s balance sheet owing to their direct influence on the profit margins.
Key Takeaways
- “Freight Out” refers to the transportation cost associated with the delivery of goods from a seller to a buyer. It’s an expense incurred by the seller who is responsible for transportation or freight cost.
- It’s also known as “delivery expense”. It is typically listed within the “selling expenses” section on the Income Statement, or sometimes it might be noted as part of the cost of goods sold (COGS).
- Freight Out cost can have a significant impact on the profitability of a business. A company needs to manage these costs effectively to maximize its profits. It could involve strategies like negotiating contracts with shipping companies or selecting optimal routes or modes of transport.
Importance
Freight Out is a critical financial term because it refers to the cost of transportation incurred by a company when delivering goods to its customers after a sale has been made.
It is considered an operating expense in the profit & loss statement, which impacts the overall profitability of the business.
Accurately tracking and managing these costs is essential for businesses as it affects the selling price of goods, the gross margin measurement, and the ultimate profit or loss of the business.
Furthermore, businesses need this information to determine whether specific sales are cost-effective and to make informed decisions regarding distribution strategies.
Explanation
Freight Out, also known as delivery expense or transportation-out costs, plays a vital role in keeping track of a company’s total operational expenses. It is typically used to account for the cost borne by a business to transport its goods from its premises to the end customers.
Therefore, it is closely intertwined with the logistics and supply chain aspect of a business, helping the business ascertain the cost efficiency and price competitiveness of their goods. In terms of its application in financial analysis and reporting, Freight Out is an important factor in evaluating the cost of goods sold (COGS) and the profitability of an enterprise.
Accurate accounting of Freight Out helps companies make strategic decisions about pricing, sourcing, and overall logistics management. When detailed under selling expenses in the income statement, it gives stakeholders a clear picture of the company’s operational efficiency related to distribution activities and directly influences their understanding of the company’s financial health.
Examples of Freight Out
Freight Out, also known as Delivery Expense, is a term used in finance and accounting to refer to the transportation cost associated with the delivery of goods from a seller to a buyer. Here are three real-world examples:
An online clothing retailer: When you purchase a pair of jeans from an online store, the company factors in freight out costs, which include the expenses required to ship the item from the warehouse to your provided address. The charges could be included in the price of the item, or it could be added as an additional shipping fee at checkout.
Manufacturing Companies: A factory producing furniture may sell their products to resellers. The cost of transporting the furniture from the factory to the reseller’s location is considered as freight out. In many cases, this cost is passed on to the reseller as a separate bill or included in the overall product cost.
E-Commerce Platforms: Companies like Amazon or eBay often have to handle huge volumes of freight out costs due to their vast quantity of sales and deliveries. They manage these costs by negotiating deals with courier services or in some cases, adding a delivery charge to the customer’s total amount at checkout.
FAQs about Freight Out
What is Freight Out?
Freight Out refers to the transportation costs associated with the delivery of goods from a seller to a buyer. This cost is typically paid by the seller and is considered an operating expense.
Is Freight Out considered a part of COGS (Cost of Goods Sold)?
No, Freight Out is not a part of COGS. It is considered an operating expense that is incurred in order to deliver goods to the customer.
How is Freight Out handled in accounting?
In accounting, Freight Out is recorded as an expense in the income statement. It is not part of the cost of manufacturing or producing goods, but is linked to the sale of products.
How can Freight Out costs be minimized?
Freight Out costs can be minimized by implementing efficient logistic solutions, opting for economical modes of transportation, and by consolidating shipments.
What is the difference between Freight In and Freight Out?
Freight In is the cost of transporting goods from a supplier to the buyer (usually a business), while Freight Out refers to the cost of transporting goods from the seller (business) to the final customer.
Related Entrepreneurship Terms
- Shipping cost: The price that the company has to pay towards moving their goods from one place to another.
- Cost of goods sold (COGS): The aggregated cost of all the products sold by your company during a particular period.
- Delivery expense: An expense that a company incurs while delivering goods to the customers.
- Inventory management: This refers to tracking and managing stocked goods to ensure high sales.
- F.O.B Shipping point: A contractual term which indicates that the ownership of goods is transferred to the buyer as soon as the goods leave the seller’s place.
Sources for More Information
- Investopedia: A website focusing on investing and finance education along with market news.
- Corporate Finance Institute: A professional services company offering in-depth courses and resources for financial analysts.
- Accounting Tools: A resource hub comprised of thousands of articles about accounting, costing, finance, and much more.
- The Balance: A resource for personal finance advice, budgeting tips, and financial guidance.
