Accounting Question

Factual Questions
1

Could anyone tell me what common practice is for handling shipping costs for goods received in a retail environment?

Is shipping added to the cost of the goods and part of your inventory so you don’t pay for shipping until the goods are actaully sold?
Or are shipping costs a seperate entry that become an expense at the same time you receive the goods?

In other words are shipping costs an expense that is incurred up front or are they accounted for as a loss in margin when the goods are sold?

2

I’m still a student, so take this cum grano salis, but every textbook I’ve ever used and every professor I’ve ever had has included freight-in costs on merchandise for resale as a product cost. IOW, freight-in is capitalized as part of the cost of goods in inventory and is accounted for as part of the cost of goods sold when the inventory is sold.

And you still pay for the freight charges up front, it’s just that they aren’t specifically separated from the cost of the inventory as a period cost, but are included as a product cost in the inventory account.

3

Okay, question 2:

How do I determine shipping costs per item? I can take an invoice with 100 units and a shipping cost of $5 and add 5 cents to each items cost, but I may receive another shipment of them that sends me 5 units for $3 shipping, and another that sends me 500 units for $10 shipping.

4

Now you’re getting into Management Reporting so the answer really comes down to “it depends”. How do you want to see it? Off the top of my head you can do it a couple of ways:

  1. You can pool everything together so, using your example, you would have 605 units with $18 worth of freight so you would expense $0.02975 of freight per unit sale.

  2. You create pools of inventory and expense the freight according to your inventory method (FIFO (first-in, first-out), LIFO (last-in, first-out), etc). Per your example you would have three pools:
    Pool 1 - 100 units - $5 freight
    Pool 2 - 5 units - $3 freight
    Pool 3 - 500 units - $10 freight
    Assuming a FIFO inventory method, for each of the first 100 unit sales, you would expense $0.05 of the freight. The next 5 unit sales you would expense $0.60 and the last 500 unit sales, you would expense $0.01.

The second method is preferrable if you are purchasing the items at different costs each time because you would create pools of the total cost (purchase price and freight) and expense them as the sales occured.