Are Shipping Costs Included in COGS?

Shipping costs are a key consideration for businesses. Understanding their inclusion in Cost of Goods Sold (COGS) is important for accurately assessing a company’s profitability. The classification depends on their purpose: bringing inventory into the business or delivering products to customers.

Understanding Cost of Goods Sold

Cost of Goods Sold (COGS) represents the direct costs of producing goods a company sells during a specific period. This figure is subtracted from revenue to calculate gross profit, providing insight into a company’s core profitability. COGS includes expenses directly tied to product creation or acquisition.

For manufacturers, COGS includes direct materials, direct labor, and manufacturing overhead like factory utility costs or equipment depreciation. For retailers or wholesalers, COGS is the purchase price of goods acquired for resale.

Inbound Shipping Costs

Inbound shipping costs are expenses incurred to transport raw materials or finished goods from a supplier to a business’s location. These costs are an integral part of acquiring inventory. They include freight-in, delivery fees, handling, and customs charges.

Accounting principles require these costs to be “capitalized,” meaning they are added to the inventory’s cost. For example, if a retailer purchases goods for $1,000 and incurs $50 in freight-in, the inventory is recorded at $1,050. This higher inventory cost then flows into Cost of Goods Sold when the inventory is sold.

Outbound Shipping Costs

Outbound shipping costs are expenses incurred by a business to deliver finished goods from its location to customers. These costs are associated with the selling and distribution process, not inventory acquisition or production. Examples include shipping charges for online orders or delivery fees.

Unlike inbound shipping, outbound shipping costs are not included in Cost of Goods Sold. Instead, they are classified as operating expenses on the income statement, often under selling expenses or as part of Selling, General & Administrative (SG&A) expenses. This treatment reflects that these expenses are incurred after goods are ready for sale and are part of generating revenue.

Recording and Financial Statement Impact

Properly classifying shipping costs is crucial for accurate financial reporting. Misclassifying these expenses can distort key financial metrics. For instance, incorrectly including outbound shipping costs in COGS would inflate COGS and understate gross profit.

Conversely, expensing inbound shipping costs immediately instead of capitalizing them would understate inventory value on the balance sheet and overstate gross profit. When that inventory is later sold, COGS would be understated. Such inaccuracies can affect financial ratios, investor perceptions, and internal decision-making regarding pricing strategies, operational efficiency, and tax liabilities. Consistent accounting treatment ensures financial statements reliably reflect the business’s economic performance.