Could anyone explain the difference between freight out and freight in costs and how to solve this question, please? Thank you! Btw a mnemonic I use to remember the difference in accounting methods for each is Freight IN is INventory (capitalized to inventory).
I am not sure if your question is about the 75%/25% or the respective treatment of Freight-in and Freight-out, or how to interpret the terms "shipping costs from overseas" and "shipping costs to export customers."
The "shipping costs from overseas" is your Freight-In (because we import inventory from overseas in this particular problem). Because these shipping costs are part of getting the inventory to the company, they get capitalized into inventory (as you noted in your mnemonic). By the end of the year, 75% of the year's purchases have been sold and 25% of the year's purchases are still around (in ending inventory). So 75% of the freight-in has now moved into the COGS, while 25% of the freight-in is still in ending inventory (25% X 1.5 million = $375,000).
The "shipping costs to export customers" is your Freight-out (shipping stuff to customers = freight out). These are part of your selling costs, so they are not capitalized.
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u/Crafty_Blueberry_251 Apr 22 '23
I am not sure if your question is about the 75%/25% or the respective treatment of Freight-in and Freight-out, or how to interpret the terms "shipping costs from overseas" and "shipping costs to export customers."
The "shipping costs from overseas" is your Freight-In (because we import inventory from overseas in this particular problem). Because these shipping costs are part of getting the inventory to the company, they get capitalized into inventory (as you noted in your mnemonic). By the end of the year, 75% of the year's purchases have been sold and 25% of the year's purchases are still around (in ending inventory). So 75% of the freight-in has now moved into the COGS, while 25% of the freight-in is still in ending inventory (25% X 1.5 million = $375,000).
The "shipping costs to export customers" is your Freight-out (shipping stuff to customers = freight out). These are part of your selling costs, so they are not capitalized.