How to Calculate Freight In Costs for Inventory

Freight in represents the costs incurred by a business to transport inventory or raw materials to its premises. These expenses are directly associated with acquiring goods and preparing them for sale or production. Calculating freight in is a fundamental aspect of determining the true cost of goods, which in turn impacts accurate inventory valuation on a company’s balance sheet. Understanding freight in is essential for businesses to determine profitability and make informed financial decisions.

What Constitutes Freight In

Freight in encompasses various expenditures necessary to bring inventory to its intended location and condition for sale. The most common components include direct transportation charges, such as shipping and carrier fees, paid to move goods from a supplier to the business’s facility.

Other costs include insurance premiums paid to protect goods during transit. Customs duties and import taxes are also direct costs. Handling fees, such as those for loading, unloading, or brokerage services, are also included.

Different Calculation Approaches

Once the various components of freight in are identified, these costs must be allocated to the specific inventory items. One approach is specific identification, used when freight costs can be directly traced to individual inventory items or specific purchase orders. This method is practical for high-value or unique items where the freight cost per unit is readily available.

For situations involving multiple items in a single shipment where direct tracing is not feasible, proportional allocation methods are commonly employed. A weight-based allocation distributes the total freight cost proportionally based on the weight of each item in the shipment. This method is suitable when shipping costs are primarily driven by the physical weight of the goods.

Alternatively, a value-based allocation assigns freight costs based on the monetary value of each item. This method is often preferred when the cost of shipping correlates more closely with the value of the goods rather than their weight or volume.

Practical Calculation Examples

To illustrate the application of freight in calculations, consider a scenario where a business receives a shipment containing two different inventory items, Item A and Item B, with a total freight bill of $100. Using a weight-based allocation, if Item A weighs 200 pounds and Item B weighs 300 pounds, the total shipment weight is 500 pounds. Item A accounts for 40% of the total weight (200/500), so it would be allocated $40 of the freight cost ($100 40%). Item B, representing 60% of the weight (300/500), would be allocated $60 of the freight cost ($100 60%). The allocated freight cost is then added to the original purchase cost of each item to determine its total inventory cost.

For a value-based allocation, assume Item A has a purchase cost of $800 and Item B costs $1,200, making the total purchase value $2,000. Item A represents 40% of the total value ($800/$2,000), so it would be allocated $40 of the freight cost ($100 40%). Item B, accounting for 60% of the value ($1,200/$2,000), would be allocated $60 of the freight cost ($100 60%). These allocated freight costs are then capitalized, increasing the cost basis of each inventory item.