The Purchase Order module allows freight charges to be added in several places, using two different techniques. The technique used depends, in part, on the internal accounting methods being used, since accounting methods often relate to inventory turnover.
Low inventory turnover generally requires freight costs to be tracked with the inventory items. In this case, the freight costs are included in the cost of the items sold. For inventory with a high turnover, freight is often tracked as a lump sum shown in the Cost of Goods Sold section of the Income Statement. For example, assume $50,000 worth of goods are sold in a month at a cost of $30,000. For the sake of this discussion, there are two categories in inventory: chairs (with high turnover) and desks (low turnover). The table below shows the break down of sales, cost, and freight for these categories.
Category Sales Cost Freight
chairs 40,000 22,000 950
desks 10,000 8,000 200
For low inventory turnover, the cost of goods sold section of the Income Statement may be presented as:
Gross Margin - Desks
Sales 10,000.00
Cost of Sales -8,200.00
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Total Gross Margin - Desks 1,800.00
A high inventory turnover item may be presented in the Income Statement as:
Gross Margin - Chairs
Sales 40,000.00
Cost of Sales 22,000.00
Freight In 950.00
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Total Gross Margin - Chairs 17,050.00
Notice in the low turnover case, freight costs were include in Cost of Sales, while the high turnover case listed freight separately. Again, the method chosen depends solely on your companys internal accounting guidelines.
For non-inventory items, freight costs are usually added to the cost of the item being purchased when determining the items accounting cost (like purchasing a fixed asset). This implies using the item by item method for tracking freight.