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.