In some instances we use our own trucks and in others we use an outside carrier to make these transfers. Also, in some instances we are moving the stock because of a customer order out of a warehouse with a stock shortage and in other cases it is just a rebalancing of the product mix at each location. Any guidance would be appreciated!
Should transportation costs associated with inventory transfers between warehouse locations be expensed or recorded as an increase to the inventory value?
Answers
IMHO, no, just expensed. Freight in is capitalized, not the cost for storage or associated costs (in your case moving it).
Anon,
I would track these charges to a separate freight account so that you can measure the cost of moving inventory for resale separately from the cost of actually delivering it. It's hard to be perfect with the right product mix in the right location all the time, this metric will help forecasting and inventory
Initial freight in should be added to the value of the inventory (per GAAP as it makes up the initial valuation of the inventory - along with any testing, etc). Movement between warehouses does not add value and is therefore expensed.
According to Steven Bragg in his "GAAP Guidebook", "In general, inventory is to be accounted for at cost, which is considered to be the sum of those expenditures required to bring an inventory item to its present condition and location." Taken literally, your transfer costs should be added to the inventory value and not expensed. I can see that if the transfer is across town, the work involved in capitalizing that cost would seem frivolous. But what about a transfer 200 miles away, or 500, or 1,000 miles away? I think you may want to establish a threshold beyond which you capitalize the cost. This especially makes sense if you want to generate accurate gross profit reporting on these subject items that have been transferred. You'll want accurate landed costing. I'm going though a similar consideration right now whereby my client is opening a remote warehouse 2,000 miles away. We are going to add the marginal transit costs from our main facility to this new remote facility so that our COGS and GP reporting reflects accurate landed costs for sales fulfilled from this new remote facility.
Depends what the transfer was for. If it's common practice to transfer select inventory direct from vendor XYZ to warehouse A and then immediately transfer to warehouse B, then I would push hard to convince the external auditors it should be capitalized. All other instances are SG&A expenses as freight out.
To add more to my comment. I have also seen companies capitalize most warehouse and freight costs to unique accounts and amortize that inventory to COGS based on turns analysis. For a public company to change their methodology, they will most likely need to restate prior financial statements.
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