Managing costs and expenses is a never-ending responsibility in the supply chain. One important supply chain accounting measure is freight cost allocation, specifically knowing how to allocate freight costs to inventory.
Transportation management systems (TMS) make 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?
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
Freight cost allocation and freight budgeting are crucial for proper accounting when balancing expenses and profits.
Optimizing freight cost accounting processes and habits saves 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%
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 TMS That Does It For You
Effective and reliable freight cost allocation and inventory management 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.