Shipping and Freight Costs as Expense or COGS? (2024)

FAQs

Shipping and Freight Costs as Expense or COGS? ›

Whenever you pay for shipping out to your customer, this is not included in COGS but is a monthly expense. This expense of shipping to the customer is directly related to the sale of the product, so we include it in the Cost of Sales section and include it in the gross profit calculation.

As mentioned above, inbound shipping costs are part of COGS. However, shipping to the consumer is not. It's important to stay on top of these expenses as they affect your bottom line significantly and can eat away at your profit if you don't have a shipping cost reduction strategy in place.

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.

Your COGS should only include direct costs.

For example, a shoemaker's COGS should only include the materials that go into the production of shoes and labor costs to make the shoes. The materials used for shipping and the labor used to sell the shoes should not be included in COGS figures.

The shipping expenses are held in inventory until sold, which means these costs are reported on the balance sheet in Merchandise Inventory. When the merchandise is sold, the shipping charges are transferred with all other inventory costs to Cost of Goods Sold on the income statement.

The price of shipping and installing equipment is a capitalized cost on the company's books. Similarly, costs related to shipping containers, transportation from the farm to the warehouse, and taxes may also be capitalized.

As a result, material costs, freight, duty, etc. should all be reflected in the cost of the company's acquired inventory. Therefore, these increased freight costs should be capitalized into the cost of inventory subject to certain exceptions, as discussed below.

If you track your expenses by department, then shipping would likely fall under your "operating expenses". This would include all the costs associated with running your business, like rent, utilities, payroll, and shipping.

The gross amount will be the price of the item + the shipping charge paid by the buyer.

If you send the freight out cost to the customer, you can record it as an unpaid bill in the income statement next to the freight expense. This way, when the customer pays, it can offset the cost. You may have a negative freight out expense depending on what you charge the customer and what you pay for the invoice.

What expenses are not included in COGS? ›

Costs that keep a business running but that are not directly related to making or obtaining inventory — such as administrative and selling expenses — are not included in COGS. These may include office rent, accounting and legal fees, advertising expenses, management salaries, and distribution costs.

For example, the cost of packaging, storage costs, wages, and raw materials must be included in the COGS calculation. You should exclude the commission you pay your employees, product development costs, and overhead costs.

For example, with a warehouse packed with inventory, COGS includes the money spent creating the goods and transporting them to the warehouse. Contrarily, the costs of keeping that warehouse running, such as rent and utilities, are operational expenses.

Whenever you pay for shipping out to your customer, this is not included in COGS but is a monthly expense. This expense of shipping to the customer is directly related to the sale of the product, so we include it in the Cost of Sales section and include it in the gross profit calculation.

The seller will record the freight cost as a delivery expense, and it will be debited to the freight-in account and credited to accounts payable. The seller still legally owns the goods during the shipping process.

Yes, shipping costs to ship resale items to buyers are a business expenses. If the item sells for $50, for example, and shipping cost is $5, you would report $55 in revenue (amount paid to you by customer) then report $5 to 'Shipping Costs' on your Schedule C.

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.