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Selling Fees and Shipping to Customer

Selling Fees and Shipping to Customer - Cost of Goods Sold or Selling Expenses?

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The American IRS clearly states that freight-in costs are be included in cost of goods sold, but that freight costs for sending sold goods to customers may not be included in COGS, and the same goes for selling expenses such as auction fees. However, in the UK, it does not seem so clear-cut. Some accountants believe that, since shipping expense and auction fees are direct costs (no sales = no expenses in these categories) then they should be in COGS. Others opine that they should be included in overheads. 

Clearly, the distinction makes no difference from a net profit or taxation point of view, but I am wondering what the consensus here is on this? Is there a consensus?

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By David Ex
17th May 2022 00:16

Deejay wrote:

Clearly, the distinction makes no difference from a net profit or taxation point of view, but I am wondering what the consensus here is on this?

Wouldn’t waste too much time worrying about something that, as you note, isn’t of any great significance.

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Replying to David Ex:
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By Deejay
17th May 2022 05:36

It's not so much a worry, but something that piqued my interest.

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By Hugo Fair
17th May 2022 01:15

Unlikely to be a consensus, given that the treatment will usually be determined by the relevance to the business model of a particular organisation.

Speaking of which, how does this post relate to the opening sentence of your other recent post .. which states "I operate a car breaker (dismantler)"?

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Replying to Hugo Fair:
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By Deejay
17th May 2022 03:24

Hugo Fair wrote:

Unlikely to be a consensus, given that the treatment will usually be determined by the relevance to the business model of a particular organisation.

In what way do you think that the organisation's business model would determine the treatment?

Quote:
Speaking of which, how does this post relate to the opening sentence of your other recent post .. which states "I operate a car breaker (dismantler)"?

They are separate threads. There is no relation.
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By tom123
17th May 2022 07:36

Shipping costs are part of cost of goods sold, but in a reasonable size organisation will have their own line.

Container prices have gone through the roof, so you would often want shipping separate so that you have consistency of the elements of cost over time - ie my materials are still 30% of cost of goods, but shipping is now 6~% rather than 3%.

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By Winnie Wiggleroom
17th May 2022 09:05

IMHO

Selling fees (eg Amazon, Ebay fees) are fees only incurred when a sale is made and are charged based on the selling price = COGS
However there is an argument that some of these fees are fixed (advertising etc) and could be split into overheads, but the different types of fees incurred on Amazon for example are so many that it might be difficult to split, so I would still maintain they are COGS.

Transaction fees are variable depending on the method of payment = overhead

Shipping fees, no sales no cost = COGS

But the two most important things are that each cost can be separately identified for management purposes even if it ends up being summarised in the stat accounts, and that the treatment is consistent year on year

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By WhichTyler
17th May 2022 09:11

If you make it part of total 'Cost of Sales' rather than 'Cost of Goods Sold' then you satisfy the pedants and make presentation clearer

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By DJKL
17th May 2022 10:08

https://www.legislation.gov.uk/uksi/2008/409/schedule/1/made

The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008

As referenced in FRS102 1AB.1

https://www.frc.org.uk/getattachment/69f7d814-c806-4ccc-b451-aba50d6e8de...(March-2018).pdf

Appendix B to Section 1A

" As set out in paragraph 1A.14 a small entity shall present its profit or loss for a period in an income statement in accordance with the requirements for a profit and loss account set out in either Part 1 General Rules and Formats of Schedule 1 to the Small Companies Regulations21 or Part 1 General Rules and Formats of Schedule 1 to the Small LLP Regulations. This results in three alternatives:
(a) apply the required profit and loss account formats as set out in legislation (subject
to any permitted flexibility);
(b) draw up an abridged profit and loss account (see paragraph 1AB.2)22; or
(c) adapt one of the profit and loss account formats (see paragraphs 1AB.3 and
1AB.4).

So, I suggest following this layout:

Turnover,
Cost of Sales,
Gross Profit,
Distribution Costs,

the latter being a handy place to post such costs.

P.S. No idea what FRS105 permits as never use it.

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By adam.arca
17th May 2022 12:55

Not that I am in any way consistent on the subject but, on first principles, I would agree with the IRS.

Inward shipping is part of the cost of bringing stock into its current state and condition and is generally not discretionary. so (for me, generally) is COS.

Outward shipping costs are usually to some extent a discretionary decision although driven at least in part by the business model. There is also the problem of some sales lines attracting shipping costs but others not: to include outward shipping as part of COS therefore potentially distorts margin.

On these principles and as DJKL points out, distribution costs is the home for outward shipping.

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By john hextall
23rd May 2022 10:04

We include shipping costs in COGS. Overall, it is about 6% of turnover and it seems logical to call it a direct expense. Sometimes, the shipping is arranged by the customer and there is no cost to us. Sometimes, we recoup some of the cost by charging for delivery. This is recorded as a separate sales line. When costing new products, we do not include shipping in the margin calculations because it can vary so much depending on quantity shipped and to where, but we do include it in the actual gross profit achieved. This, of course, makes the actual gross profit 6% less than the blended margin on all the products.

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