Logistics costs are a significant component of the overall expense structure for any business involved in the sale and movement of physical goods. Successfully managing these expenses directly influences a company’s financial health. Within the framework of delivering products to customers, “Freight Out” is a specific financial concept that captures the expenses associated with the final leg of the supply chain.
Defining Freight Out
Freight Out is the expense a seller incurs to transport finished merchandise from its location to the final destination specified by the customer after a sale has been completed. This cost is tied to the physical movement of inventory already purchased by the buyer. The expense covers all charges related to the shipping process, including transportation fees, handling charges, and insurance costs paid by the seller until the goods are successfully delivered. The total value of the expense fluctuates based on the mode of transport, distance traveled, and contractual terms agreed upon with the carrier.
How Freight Out is Accounted For
Freight Out is classified as an Operating Expense on the Income Statement. This expense is grouped with other selling or administrative costs necessary to run the business but not directly related to the production of goods. Under Generally Accepted Accounting Principles (GAAP), Freight Out is recorded below the Gross Profit line.
Because it is considered a selling expense, the cost is explicitly excluded from the Cost of Goods Sold (COGS) calculation, which is reserved for expenses tied to acquiring or manufacturing the product itself. This placement means Freight Out reduces Operating Income (EBIT) but does not affect the calculation of Gross Profit. This distinction allows for a clear assessment of a company’s core profitability before considering distribution expenses.
The Difference Between Freight Out and Freight In
The distinction between Freight Out and Freight In is a fundamental separation in logistical accounting, impacting different sections of the financial statements. Freight In represents the shipping and handling costs incurred by a company to bring inventory into its possession. These costs are capitalized, meaning they are added directly to the cost of the inventory and become part of the Cost of Goods Sold (COGS) when the goods are sold.
Freight Out, conversely, is the cost of shipping products out to the customer. As an operating expense, it occurs after the sale is recorded and is not part of the inventory cost. This difference means Freight In increases COGS and lowers Gross Profit, while Freight Out reduces Operating Income instead. Keeping these costs separate provides a clearer picture of a company’s production versus distribution efficiency.
Strategic Implications of Managing Freight Out Costs
Managing Freight Out costs is a strategic endeavor that directly influences customer experience and overall profitability. When a company absorbs these delivery costs, it can offer customers free shipping, which serves as an incentive but compresses profit margins. Conversely, passing the full cost on to the customer maintains margins but can negatively impact sales volume. Companies must analyze the trade-off between customer acquisition and expense management.
Reducing this expense requires continuous negotiation with third-party logistics providers and freight carriers to secure better volume-based rates. Optimizing the distribution network, such as using regional fulfillment centers closer to large customer bases, can reduce the distance and time products must travel. Strategic decisions about packaging and consolidation can also lower the physical dimensions and weight of shipments, leading to reduced carrier fees and improved operating income.
Key Shipping Terms Related to Freight Out
Specific industry terms dictate who legally owns the goods and who is responsible for paying transportation costs, which determines whether the seller incurs Freight Out.
FOB Destination
FOB Destination means the seller retains ownership and is responsible for the goods until they are delivered to the buyer’s location. Under this arrangement, the seller incurs and pays the Freight Out expense, making it an operating cost on their income statement.
FOB Shipping Point
FOB Shipping Point means the title and risk of loss transfer to the buyer the moment the goods leave the seller’s facility. When this term is used, the buyer is responsible for the shipping costs, and the seller records no Freight Out expense for that transaction.
Transportation methods also influence the total Freight Out expense.
Less-Than-Truckload (LTL)
LTL shipping is used when a shipment does not require an entire trailer, allowing multiple customers’ freight to be consolidated onto a single vehicle.
Full-Truckload (FTL)
FTL is utilized when a shipment is large enough to occupy the entire trailer or when a dedicated shipment is necessary for speed or security. FTL generally offers a lower cost per unit of weight than LTL but represents a higher total expense, and the choice between them impacts the final Freight Out figure.