How to Allocate Freight Costs to Inventory

A connected TMS provides information you need to know how to allocate freight costs to inventory.

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.

A TMS makes this possible by helping users assign or allocate all costs to individual shipments. Further, shippers must have a clear understanding of how freight allocation works.

What Are Freight Costs in Accounting?

Freight costs in accounting are the literal costs associated with transportation. This includes costs that are beyond the actual carriers’ billed charges. Yes, billed charges are part of the conversation, but the indirect costs associated with finding capacity, even back-office costs, should be taken into account.
As an example, think about how long it may take your team to find available container capacity, and then consider the total cost of the container plus the time spent managing that freight. That’s especially true when rates skyrocket.

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

How to Allocate Freight Costs to Inventory

Freight allocation and freight budgeting are crucial for proper accounting when trying to maintain the balance between expenses and profits. Optimizing freight cost accounting processes and habits can save shippers a major percentage of the costs involved with maintaining inbound or outbound freight cost and inventory allocation considerations.

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%

This ending amount is the shipping costs as a percentage of inventory and can be used to better understand the percentage of freight costs within your profitability. These 5 tips can help ensure success.
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 Inventory
Shippers 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/Unloading
Inventory 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.

Calculate your potential Saving While Using an enterprise TMS

Partner With MercuryGate to Streamline Freight Allocation Costs to Inventory

For improved freight logistics and inventory management, it is vital for shippers and transportation companies to allocate freight costs, adapt to changing markets, and scale to meet shifting customer demands.

MercuryGate’s cloud-based TMS platform is easy to use and offers a positive experience for shippers, carriers, 3PLs, and all partners. Contact the MercuryGate experts for a demo today to see how applying freight allocation costs to inventory can make freight cost management faster and easier.

Contact the Experts in Cost Allocation at MercuryGate to See a Demo of It In-Action

MercuryGate
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