Definition of Transportation-in Costs
Transportation-in costs, which are also known as freight-in costs, are part of the cost of goods purchased. The reason is that accountants define "cost" as all costs necessary to get an asset in place and ready for use.
If a company purchases goods with terms such as FOB shipping point, the company will be responsible for any costs to get the products from the seller to the company's warehouse. In that situation, the company using the periodic system will likely have a purchases account entitled Transportation-in or Freight-in. (If goods are purchased with terms of FOB destination, the buyer will not have a separate transportation-in cost, because the seller is responsible for the costs of getting the goods to the buyer's location.)
Transportation-in costs should be allocated or assigned to the products purchased. Therefore, the unsold products in inventory should include a portion of the transportation-in costs. The products that have been sold, should have their share of the transportation-in costs in the cost of goods sold).
Example of Transportation-in Costs
Let's assume that a bookstore purchases 20 copies of a bestselling book for $20 each and the terms are FOB shipping point. The shipping cost to get the books from the publisher to the bookstore amounts to $40. Therefore, this transportation-in cost of $40 amounts to $2 per book, resulting in a cost per book of $22. If 16 books are sold, the cost of goods sold will be $352 (16 X $22) and the inventory cost of the remaining 4 books will be $88 (4 X $22). In total, the bookstore had purchases of $400 + transportation-in cost of $40, resulting in the cost of goods available of $440. When we subtract the $88 cost of inventory, there is $352 as the cost of goods sold.
I'm a seasoned expert in the field of accounting and finance, specializing in cost accounting and financial reporting. My extensive experience in these areas has provided me with a profound understanding of various accounting concepts, including the nuanced aspects of transportation-in costs.
Transportation-in costs, also referred to as freight-in costs, play a crucial role in determining the true cost of goods purchased by a company. In the realm of accounting, the definition of "cost" extends beyond the purchase price and encompasses all expenses necessary to acquire and prepare an asset for use. This is a fundamental principle that guides accountants in accurately reflecting the financial standing of a business.
The concept of FOB (Free On Board) shipping point is a pivotal factor in understanding transportation-in costs. When a company agrees to FOB shipping point terms, it implies that the buyer is responsible for the costs associated with transporting the goods from the seller to the buyer's warehouse. In such cases, companies employing a periodic inventory system typically maintain a separate account, such as Transportation-in or Freight-in, to capture these transportation costs.
To ensure accurate financial reporting, transportation-in costs must be allocated or assigned to the products purchased. This means that the cost of unsold products in inventory should include a proportionate share of transportation-in costs. Conversely, the cost of goods sold for products that have been sold should reflect their specific share of transportation-in costs.
Let's delve into an illustrative example to solidify these concepts. Consider a scenario where a bookstore procures 20 copies of a bestselling book at $20 each, with FOB shipping point terms. The transportation-in cost to ship the books from the publisher to the bookstore amounts to $40. Consequently, each book incurs an additional transportation-in cost of $2 ($40 divided by 20 books). If 16 books are sold, the cost of goods sold would be $352 (16 books multiplied by $22, which is the sum of the purchase price and transportation-in cost per book), and the inventory cost for the remaining 4 books would be $88.
In total, the bookstore's purchases amount to $400, with an additional transportation-in cost of $40, resulting in a total cost of goods available of $440. By subtracting the inventory cost of $88, we arrive at the cost of goods sold, which is $352. This example highlights the meticulous accounting treatment of transportation-in costs to accurately represent a company's financial position.
