Freight-in represents the cost of obtaining goods from a supplier. This obviously includes transportation and shipping costs, but could also include handling and brokerage fees, customs charges, and so forth, as long as you do not need to record those as expenses in separate accounts. For typical accounting purposes, freight-in is added into the cost of goods, just as though the supplier charged a higher price.
Example
Northwind Traders purchases 100 units of an inventory item at a unit price of 4.00. Northwind’s supplier adds a shipping charge of 20.00. The fully delivered average cost of the items is not 4.00, but 4.20.
Manager provides two methods for entering freight-in costs:
- Manual allocation
- Automatic freight-in distribution
Manual allocation
To manually allocate freight-in costs to an inventory item, add a separate line item to a purchase invoice or cash payment form. Choose the same inventory item, but leave the Qty field blank. Edit the Description field to describe the freight-in costs.
Example
Northwind’s purchase and related freight-in cost are manually entered as below:
The freight-in cost is added to the average cost of the item without affecting the quantity on hand, as can be seen in the Inventory Items tab:
Notes
Manual allocation is the only method available for cash payments (non-credit purchases).
It should be used whenever freight-in costs of separate inventory items can be determined independently, such as from separate line items on shipping invoices.
Manual allocation should also be used when freight-in costs are not proportional to line item amounts, such as when inexpensive but heavy items cost more to ship than lighter but more expensive items. Just add multiple line items and allocate the separate freight-in costs to their appropriate inventory items. Of course, to use this method, freight-in costs attributable to different inventory items must be separately determinable.
Automatic freight-in distribution
Automatic freight-in distribution to a single item
When recording purchases with purchase invoices, freight-in can be added to inventory cost by adding a line item and selecting Freight-in in the Item field. (This line item replaces the blank-quantity line item for the inventory item used in the manual allocation method.) As for manual allocation, the Qty field can be left blank. Or it can be used to force Manager to calculate a Total. In that case, the unit price should be proportionally reduced. Results are identical to the manual allocation method.
Example
In the same situation as the previous example, Northwind Traders enters a purchase invoice and selects Freight-in in the Item field for the second line item:
Automatic freight-in distribution to multiple items
If you record the purchase of multiple inventory items on the same purchase invoice, you do not need to manually calculate the freight-in cost per inventory item. Instead, add a line item and select Freight-in in the Item field. Leave the Qty field blank or use it to force calculation of a Freight-in Total. Manager will distribute the freight-in Amount proportionally (based on total amounts) to all inventory items purchased. This is exactly the same process described above for automatic distribution to a single item. But in the prior case, all freight-in cost went to the single item because it constituted 100 percent of the purchase.
Example
Northwind purchases two items from the same supplier and wants to distribute freight-in costs proportionally. It enters the following purchase invoice:
Freight-in costs are split according to the line item totals. They are added to the average cost of all inventory items purchased on that purchase invoice:
Entering separate freight-in charges
When freight-in charges are billed by and paid to different suppliers than inventory item(s), separate payment forms or purchase invoices are required. After all, you cannot record amounts paid to one entity on a transaction form for another. Examples include:
- Direct billing by freight companies
- Separate invoices from freight forwarders
- Fees from brokers
- Customs charges
For these situations, both manual allocation and automatic distribution are available. Manual allocation can be used in all cases. Automatic distribution can be used under limited circumstances and includes drawbacks some users (or their accountants or auditors) may not like.
Manual allocation of separate freight-in charges
Manual allocation is most convenient when only one or very few inventory items are involved. (But see the Note below on a simple way to enter data for many items.) It is required when freight-in costs are not proportionally distributed according to line item totals.
To use the manual allocation method, choose the inventory item to which a freight-in charge applies when entering the payment or purchase invoice to the freight-in supplier, but leave Qty blank. Edit the description to describe the freight-in charge. Enter the freight-in amount in the Unit price field. Repeat this process for every inventory item to which freight-in charges are being allocated. Dates on forms for the purchase and freight-in do not need to match. Average costs will be correctly adjusted as of the transaction date for the freight-in charge.
Example
Northwind purchases the same two inventory items from the same supplier as in the last example. But there are no freight-in charges billed by that supplier. So the Freight-in line item is left off the purchase invoice. At this point, average costs of the inventory items reflect only their purchase costs:
The items are shipped by a separate shipping company. The freight-in charges are billed by the shipping company on its own sales invoice, but broken out by inventory item. The freight-in charges are not proportional to total costs, so manual allocation is mandatory. The purchase invoice for the shipping contractor is completed as below:
Freight-in charges are allocated differently to inventory item average costs than in the previous automatic distribution example:
Note
Entering freight-in charges manually for purchases involving many inventory items may seem tedious. But there is a simple shortcut that can streamline the process. View the payment or purchase invoice by which the items were purchased. Click Clone to generate a purchase form of the same type (payment or purchase invoice) listing all the same inventory items. Edit the form for the different Payee or Supplier. Delete quantities and enter the desired freight-in allocations in appropriate Unit price fields. Click Create.
A shortcoming of this method is that payments can only be cloned to payments and purchase invoices to purchase invoices. So you cannot generate a freight-in purchase invoice in this way if the original purchase was by cash payment. Nor can you create a payment form if the original purchase was by purchase invoice. In practical application, however, these restrictions are usually not limiting.
Automatic distribution for separate freight-in charges
Automatic distribution is most convenient when there are many inventory items affected by the same freight-in charge. But it can only be used when all these circumstances exist:
- Freight-in is to be distributed proportionally by line item totals.
- Inventory items to which freight-in charges apply were all purchased via the same purchase invoice. (Automatic distribution cannot be used if they were purchased via cash payment.)
- No other inventory items were on the purchase invoice.
- The purchase invoice does not predate a lock date set to prevent alteration of prior account periods’ records.
- Both the original supplier and the separate freight-in supplier are denominated in the same currency.
The drawbacks mentioned earlier are:
- A separate balance sheet clearing account must be created and used. This account can be an asset or liability account, since its normal balance will be zero.
- Prior purchase invoices for inventory items must be modified with line items not on the original supplier’s sales invoices. This could cause confusion if disputes arise or lead to adverse findings by auditors.
The automatic distribution method requires two separate transactions. First, create a payment or purchase invoice for the freight-in supplier. Post the freight-in amount to Freight clearing or a similarly named balance sheet account. Second, reopen the original purchase invoice on which affected inventory items were purchased. Add two line items to it. On the first, select Freight-in in the Item field. Make sure Qty is blank (not zero). Enter the freight-in charge as the Unit price. On the second added line, leave Item blank. Select the freight clearing account. Enter the freight-in charge as a negative number in Unit price.
Example
Northwind Traders buys the same two inventory items. They are shipped by a separate shipping company. Northwind enters the purchase invoice for the inventory items with no freight-in charges. When the sales invoice for shipping charges arrives, Northwind enters another purchase invoice for the shipping supplier, posting the charge to Freight clearing.
Northwind then reopens the original purchase invoice for the inventory items, adds the Freight-in line and a second reversing line:
The financial result is identical to entering Freight-in using the automatic distribution method when freight-in charges are invoiced by the supplier of the inventory items (as in the example two above). But three important things happen: (1) the purchase invoice balance matches your supplier’s original sales invoice, (2) the freight-in invoice from the shipping contractor stands by itself, and (3) the clearing account is zeroed. Average costs are adjusted as below, matching what they would have been if the inventory supplier billed you for the freight-in directly:
The extra complexity arises because of the separate freight-in supplier.
Note
Whether using manual allocation or automatic distribution, if there are additional suppliers, such as for customs fees or warehouse charges, the same process must be repeated for each one.