the cost of transportation and delivery of goods to a buyer incurred by the seller.
The American economy is made up of businesses that produce the goods that consumers want to buy. After production, companies then need to get their goods from point A to point B so that they can either be sold in a place of retail or make it to the customer’s door. Shipping and handling is a commonly used term to describe the cost associated with transporting goods to a buyer. In the commercial world, freight-out is a similar term that denotes the same concept, only on a much larger scale.
The use of freight for shipping implies larger items and/or a large quantity of items being transported from one location to another predetermined location. Freight transportation often takes place in the form of pallets or large containers being transported either by large trucks (such as tractor-trailers) across the country or cargo ships internationally. From an accounting point of view, freight-out is reported as a selling expense. When calculating net income from a product that is sold, the cost of transportation of goods is subtracted from gross profit; this ensures that companies are taking into consideration the cost of delivering their goods to consumers when calculating profit for their merchandise.
Freight-out is not considered an operating expense since it is not part of the companies' daily activities. Because this cost is only incurred when goods are shipped to consumers, it is included in the cost of goods sold on the income statement. The cost of freight-out will not be included in a financial statement if the fee is billed directly to the customer, as it does not impact the company’s income from goods sold.
Example of Freight-Out
A company named Creciendo builds and sells pianos. A music school a few states away from the company has decided to update their piano classroom with their product, since they were the best deal.
Creciendo quotes them $8,000 total cost per unit for 22 entry level grand pianos, resulting in an invoice of $176,000 including all taxes and delivery fees. It is going to cost the Creciendo $14,300 to ship the pianos to the school. This was included in the total invoice billed to the school, so $14,300 will be noted in the accounting books as freight-out cost.
To calculate net income from the sale, the freight-out cost will be subtracted from the gross profit of $176,000, resulting in a net income of $161,700 for the sale.
Freight-Out vs. Freight-In
Freight-out and freight-in both refer to the cost of transportation of goods from one point to another, and typically include a transfer of ownership. As described above, freight-out is used to describe the cost of transportation or shipping that is incurred by the seller when sale of a product is made.
In contrast, freight-in refers to the cost of transportation that is incurred by the customer. These charges are denoted differently in accounting practices and also differ in their financial impact on company expense accounts.