shipping expense or COGS

Let me provide information about this, Eve. 

Shipping or freight charges can be an expense or a Cost of Goods Sold (COGS) relative to different situations.   

We can consider shipping charges to be part of COGS when they relate to the production of a product. However, if the costs are associated with transporting the finished goods, it is categorized as an expense. 

Regarding your concerns about determining your shipping costs by whether they are expenses or COGS, I suggest you consult an accountant for expert advice. This way, we can ensure you are on the right track.  

Furthermore, check out this article to learn how to personalize your sales forms: Use and customize form templates. 

I'm still all ears for any queries about managing your shipping costs. I'll be here to assist. Keep safe! 

@Eve2019 

Just to make sure we're using the same terminology, let's refer to your vendor's shipping cost that your vendor bills to you as Freight In (FI), and the cost that you incur to ship product to your customer as Freight Out (FO).

Th IRS does not require you to capitalize (add to the value of your inventory) the cost of FI if your business qualifies as a small business (less than $25M annual sales).  Therefore, you can expense it immediately.  It's up to you whether you want to record it as a COGS or an expense.  Both have the same impact on net income so it depends on where you want to see this listed on your P&L.  Personally, I think it makes the most sense for FI to be a sub-category of COGS. 

FO is an expense, not COGS.  Also, packaging supplies are an expense, not COGS, as you mentioned.

Thank you for your reply Rainflurry this is making more sense now...something came up as I was invoicing a customer hopefully you can guide me, as I understand I would still need to reach out to my accountant but now days connectiong with the community is faster.

When invoicing the customer for shipping, I have created an ITEM called S&H - Type: service -   

ACCOUNT TYPE:  INCOME or COGS?  

I do think is best to use FI and FO, as it can be confusing when reconciling only with using the word "shipping and handling".  These accounts have been already created so trying to work with them but maybe I'll will just rename them. 

Thank you

@Eve2019 

Invoicing your customer for shipping is income, not COGS.  If you were to classify it as COGS, it would decrease your COGS when invoicing a customer and you don't want that.  I was a controller for a few retail companies for many years and we had FI (sub-category of COGS), FO as an expense and S&H as a sub-category of income.  That way, you can track incoming freight costs to make sure you're getting adequate markup to cover the cost of FI.  And, you can see your FO costs relative to your S&H income to see if you're able to make your S&H more competitive.  Hope that helps.  

Hi Rainflurry,

I've got a question that's very similar. We are a small retail business, we do not sell our items typically by the pallet. Here's where my question comes in, we a billed pallet charges by a vendor and they in turn provide us a credit on the pallets once we return them to them. I do not want to incorporate the charge of the pallet into the item on it for resale purposes since I need to remain competitive with the larger stores around me (ie. Lowe's, Home Depot). How would you set up this charge? 

I understand the FI & FO portion but would that pertain my situation?

Thank you,

Cheryl

@Cheryl_H 

IMO, pallet charges are part of freight-in (FI) like other inbound shipping costs.  When the pallets are returned, the credit is posted to the same FI account and reduces your shipping charges  

Thank you so much! I was thinking the same thing but sometimes I second guess myself. 

I love your responses to the people like me. Simply put and knowledgeable.

Cheryl