Our manufacturing company pays freight-out to logistics providers to ship products from our warehouses to customers. We do not charge freight-out in our customer invoices. From what I understand, COGS consists of inventoriable costs that are considered to be necessary to produce and prepare goods for sale, so it seems like freight-out should be considered Selling Expense instead of COGS. However, I've seen other companies include freight-out in COGS and there are people in our company who believe that is the correct approach. What do you think?
Should freight-out be considered COGS or Selling Expense?
Answers
If the freight can be attributed directly to a customer or a job, then it's a COGS. In your case, it sounds like it's more of an expense because you are not the one shipping it directly to the customer. That's my take on it.
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. Distributing the goods to your customers is a selling expense and will likely vary based on delivery distance/mode.
Measure gross margin both before and after deducting freight out to assess the impact of the freight cost on your margins.
Freight and similar costs/expenses are either inventorial or expenses. How you determine this classification depends on what the activity is associated with. Inventory costs are simple - it's incurred as product is moved along during purchasing, manufacturing, and stocking. Shipping incurred during selling product can be a separate line item included as part of the COGS but not an inventory cost from the make/shelf process.
On the other hand, shipping out the door can also be a sales expense - IF your sales people have jurisdiction on selecting the mode and negotiating rates.
If your traffic department (Traffic Manager) is responsible and answerable to sales, then it's a slam-dunk, expense it to sales. If on the other hand your Traffic Manager/Shipping is responsible and accountable to your Plant Manager, then include "freight out" as a separate line item on your COGS sheet.
In your case, looks like an expense.
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Accounting