Accounting for 📝Inbound Freight on a 📝GAAP basis is expensive and complicated. To get an idea of how complicated, you can read more about it in Allocating Landed and Freight Costs or Accounting for Freight Costs: Freight Expense vs Cost of Freight COGS.
Since 2017 we’ve been reviewing the financials of thousands of emerging consumer brands at 📝Assembled Brands.
Let’s look at the two components of inbound freight separately.
Cost of freight for ingredients and components to the factory
Most of the thousands of emerging brands we’ve seen at Assembled Brands work with factories that bundle the inbound freight associated with parts and ingredients prior to manufacturing into the cost of the finished goods.
Simply put, they just charge one price per SKU and put that on the invoice. The invoice might read: 10,000 units for $35 each for a total of $350,000. Simple: credit cash, debit finished goods.
Cost of freight for getting the finished goods to the distribution center
This is where it gets complicated, especially as costs have skyrocketed recently.
Technically, as the cost of inbound freight changes, the cost of the finished goods received should fluctuate with it. Unfortunately, it takes an Oracle or SAP ERP implementation to do this properly like the global brands do.
For brands on QuickBooks Online or (gasp) QuickBooks Desktop, we noticed that many recognize the inbound finished goods freight on a 📝Cash Basis. As shipping container prices have exploded, this has caused visible fluctuations in margins, a sure sign of weak accounting practices.
For one of the larger, mostly wholesale, emerging consumer brands that we work with, we have implemented a simplification.
Accrued Freight Method
The Accrued Freight Method starts by making a table of the last ~6 months of bills from the factory and the related bills from the shippers. We maintain this table and calculate a rolling freight cost as a % of product costs.
- We capitalize the cost of the freight into an “inbound freight costs” inventory account.
- We expense the inbound freight costs as a % of the product costs in COGS.
- We adjust the estimate of freight costs quarterly.
So COGS would look like:
- Total COGS
- Product Costs
- Inbound Freight Accrual
- Fulfillment Center Expenses
- Merchant Account Expenses