Freight out

From CEOpedia | Management online

Freight out, also known as delivery expense is a cost paid for the transportation of goods that are shipped to a customer. This cost is considered as a part of the goods cost and is supposed to be added to the customer's cost for the goods[1].

Freight definition

In economics freight or cargo refers to all goods that are conveyed by land, water or air usually in order to gain commercial profit. Originally the term "cargo" was interchangeable with the term "shipload". Nowadays, it covers all types of freight, including carrying by truck, train or any kind of intermodal container[2].

Transportation cost

Going into more details, the freight out is the transportation cost associated with the delivery of goods from a particular supplier or a distributor to their customers. This cost should be charged to an expense as incurred and recorded within the cost of goods sold classification on the income statement. The freight out is not an operating expense because the supplier only incurs this cost when goods are sold to a customer rather than incurring it as a part of day-to-day operating activities[3].

If the freight out cost is billed to customers, the billings should not be netted against the freight out expense account. Instead, the revenue is supposed to be reported separately from the freight out expense. There might be a case when the amount of unreimbursed freight out is of such a small value that the balance in the freight out account is aggregated into the line "other cost of goods sold" in the income statement.

If a customer develops profitability analysis, the cost of freight out should be included, as this can result in a significant reduction in profits by customer[4].

The difference between freight in and freight out

The difference between the freight in and out is the following[5]:

  • Freight in also known as transportation in is intended to reflect the delivery expenses or transportation costs when the person being responsible for delivery is a purchaser. The buyer records this cost as freight in or transportation in.
  • Freight out also known as transportation out or delivery expense is intended to reflect the delivery expenses or transportation costs when the seller is the one responsible for a delivery of goods. The trader records the transportation cost as freight out, transportation out, or delivery expense.

Examples of Freight out

  • In international trade, freight out is the cost of transporting goods from the seller's country to the buyer's country. This cost may include custom duties, taxes, and other related expenses.
  • In domestic trade, freight out is the cost of transporting goods from the seller's warehouse or other storage facilities to the buyer's address. This may include the costs of fuel, labor, and truck rental.
  • In online shopping, freight out is the cost of shipping goods from the seller to the customer. This cost may include the cost of packaging materials, as well as the cost of the shipping company's services.

Advantages of Freight out

Freight out is an important part of the cost of goods shipped to customers. It has several advantages, including:

  • It helps to ensure that goods are delivered to the customers in a timely manner. Freight out companies can provide reliable delivery services, which helps to keep customers satisfied.
  • Freight out can help to reduce the cost of goods for customers. By using a freight out service, businesses can save money on transportation costs, as well as on packaging and other related costs.
  • Freight out services can also help businesses improve their efficiency. By using a freight out service, businesses can save time and effort in packing and shipping goods, allowing them to focus on other areas of their business.
  • Using a freight out service can also help businesses to track their goods in transit, ensuring that they are delivered in a safe and timely manner. This can help to reduce the risk of goods being lost or damaged in transit.

Limitations of Freight out

Freight out can be an expensive cost for businesses, especially those that require frequent shipping of goods. There are several limitations to this cost that must be considered when shipping goods:

  • Unpredictable Prices: Freight out costs are often unpredictable, making it difficult to budget for them. Prices can also vary based on the weight and size of the shipment, as well as the distance it needs to travel.
  • Delivery Times: Freight out can be a lengthy process, with delivery times often taking up to several weeks. This can be a major issue for businesses that need to have their goods delivered in a timely manner.
  • Limited Service Providers: Freight out is often limited to just a few service providers, meaning that businesses have fewer options to choose from and may be forced to pay higher prices.
  • Damage: Freight out can also be risky as goods may be damaged in transit. This can lead to additional costs to replace the damaged items.

Other approaches related to Freight out

Freight out is not the only approach to cover transportation expenses for goods shipped to customers. Other approaches include:

  • Free Freight: This approach allows the seller to include the cost of freight in the overall cost of goods. This approach eliminates the need for the customer to pay an additional freight out expense.
  • Drop Shipping: This approach involves having the seller ship the goods directly to the customer, eliminating the need for the customer to pay a freight out expense.
  • Third-Party Logistics: This approach involves having a third-party company handle the transportation of the goods, thus reducing the cost of freight out.

In summary, there are several approaches to covering transportation expenses for goods shipped to customers, including free freight, drop shipping, and third-party logistics. Each approach has its own pros and cons, so it is important to weigh the options carefully before making a decision.

Footnotes

  1. ↑ Weygandt J. J., Kimmel P. D., Kieso D. E., (2009), page 209
  2. ↑ Konings J. W., (2008), page 13
  3. ↑ Delaney P. R., Whittington O. R., (2009), page 165
  4. ↑ Bragg S., (2004)
  5. ↑ Griffith D. D., (2010)


Freight out — recommended articles
Liner terms — Door to door service — FOB destination — Accessorial charges — Inventory in transit — Freight prepaid — Declared value — Landed cost — Cost of goods purchased

References

Author: Anna Bodura

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