When your business grows, well, so does your freight costs. However, when you understand the services around transportation and its freight costs, you will you will have a better grasp of how to make your business profitable. Learning the key components and practices of freight and transportation accounting— like when and why you should record the freight costs for proper accounting—you can effectively manage the business and verify every expense it incurs.
Here, we listed the components and key practices that will help you manage your business:
Freight Quote and Freight Cost
Whenever you receive a freight quote from a carrier—whether a direct or through the rates serve up in your transportation management—make sure to put it into an account. With that, you will be able to point out which carrier is the best choice; the least cost carrier or if another carrier with faster transit time. Once you decide which carrier to use, try to check the bill-of-lading and you will see the freight costs. By then you will be able to determine which has lower freight costs between the two carriers. If you are too worried about your freight costs, you can avail services from Back Office Offshoring Services they’ll show you several ways to lower your freight costs.
It is a bill rendered by a carrier to a consignee of freight containing information from the description to its point of origin. Freight invoice is different from bills of loading and it does not serve as a key piece of evidence in any dispute. Freight invoice is used best during the freight audit process.
Freight and Transportation Invoice Auditing
Rising of freight costs is an emerging area of concern for all shippers over the years. Thus audit service has become more important in order to determine the difference what you were quoted at a time of shipment versus your actual freight invoice. Auditing starts once freight invoices entered into your accounting system. They are audited for accuracy, to verify the bills’ validity, mileage, duplicate payments, accessorial charges, and use of correct tariffs. In simple words, auditing’s purpose is to verify that the organization does not overpay for services it did not avail.
It is a collection of processes that can be thought of in general terms as an accounts payable service for transportation invoices. In freight payment, you can avail service providers such as 3PL. They act as the intermediary between the shipper and the carrier to receive, process, and pay invoices.
Freight Invoice Consolidation
A consolidated freight invoices service is the ideal companion for freight accounting services working in conjunction with both transportation management system and managed transportation services. These services eliminate accounts payable paperwork. This is why freight invoice consolidation is vital to any company’s bottom line when shipping LTL, TL, or small package because it makes the streamline processing simple as well as the payment for all transportation or freight invoices. On the other hand, you can ask for a logistics service provider to assist in cutting down the amount of paperwork by providing a weekly consolidated invoice.
Understanding Freight or Transportation-In & Freight or Transportation-Out
Freight-in, also called transportation-in, is if goods are sold FOB shipping point, the buyer is responsible for paying freight costs incurred in transporting the merchandise from the point of shipment to its destination. In Freight-In, merchandise that is not sold will be added to purchases in calculating net purchases.
Freight out is if goods are sold through FOB destination and the seller is responsible for costs incurred in moving goods to their desired destination. Freight cost incurred by the seller is reported as a selling expense which is subtracted from gross profit in calculating net income.
Chart of Accounts
A developed financial chart of accounts that can track all kinds of expenses which is related to providing community transportation services is a fundamental component of cost analysis for human services transportation service providers. And, its key element is the establishment of expenditure classes. There seem to be general agreements in the literature that these following expense category should be included:
- Fringe Benefits
- Purchased Transportation.
- Contracted Services.
- Materials and Supplies.
- General administrative expenses
- Casualty and Liability Costs
- Miscellaneous Expenses.
- Leases and Rentals
- Capital Expenses.
Depreciation and Amortization.
Used together, these 13 categories of expenses fully describe all costs of transportation services and each of these categories should have detailed subcategories. Furthermore, it is important to recognize that not all federal funding programs recognize all of these categories as allowable expenses under their specific funding legislation or regulations.
Different Kind of Costs
In an accounting approach, transportation providers should understand that costs may be expressed in so many different ways. These paired concepts below are considered as the costs of transportation services.
- Fixed versus variable costs.
- Capital versus operating costs.
- Direct versus shared costs.
Each of these paired concepts is an expression of 100% costs of providing transportation services and it has own value in understanding how costs are incurred and also on how to better manage transportation services.
Fixed versus Variable Costs
Variable costs are those that change with the corresponding amount of service provided. Example of these expenses is driver wages, fuel costs, and maintenance costs. When more miles and hours of service is provided by the transportation service, its costs as well as increase.
Fixed costs are those that do not change even if the service provided increases. In most systems, this means that the numbers of hours and miles of service will not affect the corresponding costs. It is constant but fixed costs include administrative salaries and facility depreciation.
Thus, variable costs are highly dependent on the amount of the service provided, while the fixed costs remain constant from year to year.
Capital versus Operating Costs
Capital costs refer to the expenses associated with long-term acquisitions and leases of physical assets such as vans, buses, garages, and maintenance facilities. These assets lose value each year, and this loss in value is known as depreciation, which sometimes is called the annual cost of capital.
Operating costs refer to those expenses that are consumed in a fiscal year to make the transit system operate. Examples of these expenses are labor, fringe benefits, materials and supplies, maintenance, office space, and equipment—all of which are essential to operating transportation services.
Direct versus Shared Costs
Expenses that can be associated on a one-to-one basis with a given service is called Direct Costs. Examples of these costs are operator labor, fuel costs, and maintenance costs. Generally, most of the direct costs of transportation service are variable costs and are the types most people think about such as driver wages and gasoline.
Shared costs are those cannot be associated on a one-to-one basis with given transportation service. These costs are representative of functions that support more than one service. Majority of the shared costs are administrative and facility costs. These costs are also known as overhead costs or indirect costs.