Managing costs and expenses is a never-ending responsibility in the supply chain. Using new technology and proactive, smart transportation is critical. So, too, is knowing how to allocate freight costs to inventory.
What Are Freight Costs in Accounting?
According to the Freightos Baltic Index, global container rates appear on track to continue an upward trend through Q2 2022. In January specifically, rates were sitting about 140% higher than January 2021.
A full view of both direct and indirect costs is essential
- Understanding the total cost of freight transportation;
- Knowing how to allocate those costs in your books.
How to Allocate Freight Costs to Inventory
One example formula demonstrates how to figure freight costs as a percentage of inventory costs. To do this, shippers will divide the shipping cost by the average inventory figure.
So, the calculation may look something like this:
$30,000 / $1,200,000 = 0.025 x 100 = 2.5%
1. Start by Calculating Your Freight Costs
It is important to remember that landed freight cost is calculated by adding a transport direct cost amount to the prepaid freight amount. An effective TMS helps shippers allocate freight costs to inventory in a more practical manner that can be applied to real-world transportation management.
2. Auto-Match Invoices Paid to InventoryShippers must embrace innovation and automation to effectively coordinate with team members, carriers, 3PL, vendors, and customers. Having a solid platform that houses an effective allocation process makes it easier to have a clear answer when asked, what are freight costs in accounting?
3. Be Sure to Include Indirect Freight Costs, Including Labor for Loading/UnloadingInventory allocation and freight cost management also must consider the accessorial expenses that go into freight transportation and inventory management. Labor, equipment rental, customs and fees, and other known and likely anticipated costs also need to be added to the TMS platform.
4. Get Real-Time Visibility Into All Freight Costs
Understanding how to allocate freight costs to inventory can make it easier to manage those fluctuating – and almost exclusively rising – freight rate costs and expenses. Real-time visibility, efficiency, and insights can make tracking in-transit goods and monitoring freight costs or related expenses easier.
5. Choose a High-Quality TMS That Does It For You
Effective and reliable freight allocation and cost inventory are dependent on a fully integrated quality TMS system. This setup essentially is a virtual warehouse for managing transportation and inventory costs and expenses. Automated systems do all the tracking and monitoring for you.