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About the Author
Harold Averkamp [CPA, MBA] has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Read more about the author.
Definition of Transportation-in Costs
Transportation-in costs, which are also known as freight-in costs, are part of the cost of goods purchased. The reason is that accountants define "cost" as all costs necessary to get an asset in place and ready for use.
If a company purchases goods with terms such as FOB shipping point, the company will be responsible for any costs to get the products from the seller to the company's warehouse. In that situation, the company using the periodic system will likely have a purchases account entitled Transportation-in or Freight-in. [If goods are purchased with terms of FOB destination, the buyer will not have a separate transportation-in cost, because the seller is responsible for the costs of getting the goods to the buyer's location.]
Transportation-in costs should be allocated or assigned to the products purchased. Therefore, the unsold products in inventory should include a portion of the transportation-in costs. The products that have been sold, should have their share of the transportation-in costs in the cost of goods sold].
Example of Transportation-in Costs
Let's assume that a bookstore purchases 20 copies of a bestselling book for $20 each and the terms are FOB shipping point. The shipping cost to get the books from the publisher to the bookstore amounts to $40. Therefore, this transportation-in cost of $40 amounts to $2 per book, resulting in a cost per book of $22. If 16 books are sold, the cost of goods sold will be $352 [16 X $22] and the inventory cost of the remaining 4 books will be $88 [4 X $22]. In total, the bookstore had purchases of $400 + transportation-in cost of $40, resulting in the cost of goods available of $440. When we subtract the $88 cost of inventory, there is $352 as the cost of goods sold.
enterprise. As a result, companies do not consider this amount in computing the cost-to-retail percentage. Rather, to arrive at ending inventory at retail, they show normalshortages as a deduction similar to sales.•Abnormal shortages, on the other hand, are deducted from both the cost and retailcolumns and reported as a special inventory amount or as a loss. To do otherwisedistorts the cost-to-retail ratio and overstates ending inventory.•Employee discounts[given to employees to encourage loyalty, better performance, andso on] are deducted from the retail column in the same way as sales. These discountsshould not be considered in the cost-to-retail percentage because they do not reflect anoverall change in the selling price.14Illustration 9-23 [page 494] shows some of these concepts. The company, Extreme SportApparel, determines its inventory using the conventional retail inventory method.EVALUATION OF RETAIL INVENTORY METHODCompanies likeGap Inc.,Home Depot, or your local department store use the retail inventorymethod of computing inventory for the following reasons: [1] to permit the computation of netincome without a physical count of inventory, [2] as a control measure in determining inventoryshortages, [3] in regulating quantities of merchandise on hand, and [4] for insuranceinformation.ILLUSTRATION 9-23Conventional Retail Inventory Method—Special Items IncludedOne characteristic of the retail inventory method is that ithas an averaging effect on varyingrates of gross profit. This can be problematic when companies apply the method to an entirebusiness, where rates of gross profit vary among departments. There is no allowance forpossible distortion of results because of such differences. Companies refine the retail method