THE IRS AND FREIGHT FACTORING
What is "Freight In?" and should your freight costs be a part of your total COGS?
This article will explain how and when freight should be applied to your scrap purchases and how that will affect your weighted average inventory.
Following the IRS guidelines that allow for additional expenses to be a part of your COGS will help your business understand its "true" costs and how to properly gauge your profits before selling.
When WeighPay is implemented we spend a great deal of time understanding your freight and the best methods of applying freight to your COGS.
"Freight In" factoring allows your company to track the costs that are dropped into your weighted average inventory. You need a software solution that allows for freight factoring on a line item level and not just reducing the total ticket amount for the entire freight amount.
Using Freight Factoring (FF) when purchasing scrap metals allows your freight costs to be factored in to the overall purchase of scrap metals, this allows your incoming inventory weights and values to reflect the "True Cost of Goods"
Sample: buying a 1000 lb of material, if the agreed to price is $1/lb, you would owe your supplier $1000, but, if your company is paying for the trucking fees to bring in the load then you would want to deduct the freight rate from the total price so your inventory drops in with cost - freight, $1000 - $200 FF Adj = $800 total cost of goods / 1000 lb = $0.80/lb ave price = your true cost of goods. If you had more than one line item you would need to divide the FF between each line item based on the net weight.
WeighPay offers a new Freight Factoring feature (FF), you can enter the fright rate at any time during the Supplier Ticket building process and the software will automatically place the proper freight deduction on each line item based on the net weight for each item.
“Freight in” as defined in the IRS Tax Guide for Small Business as “Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold.”
Whenever you pay for shipping out to your customer, this is not included in COGS but is a monthly expense. This expense of shipping to the customer is directly related to sale of the product, so we include it in the Cost of Sales section and include it in the gross profit calculation.
Typically there is an expense account in the Cost of Sales section of your Profit and Loss Statement for shipping and it is used in this situation.
In the next article we will discuss tracking Freight for Outbound loads and the power of Hauler Contracts to control and hedge your freight costs.