Freight cost is an important component of logistics and supply chain management. Businesses need to understand how much it costs to transport goods, how freight expenses should be allocated across products and how transportation costs affect profitability.
1. What Is Freight Cost per Unit?
Freight cost per unit represents the transportation cost allocated to each unit of goods shipped.
It helps businesses compare shipping costs across products, suppliers, routes and transportation methods.
Freight Cost per Unit = Total Freight Cost ÷ Number of Units Shipped
This simple formula works when the shipment cost can reasonably be allocated equally across all units. For shipments containing products with different weights, volumes or handling requirements, another allocation basis may be more appropriate.
2. Practical Example: Freight Cost per Unit
A company transports 1,000 units of a product from its supplier to its warehouse.
| Particulars | Amount |
|---|---|
| Transportation charge | ₹12,000 |
| Loading and handling | ₹2,000 |
| Total freight-related cost | ₹14,000 |
| Units shipped | 1,000 |
Total freight-related cost = ₹12,000 + ₹2,000 = ₹14,000
Freight cost per unit = ₹14,000 ÷ 1,000
Freight cost per unit = ₹14
If the goods cost ₹200 per unit, the purchase cost plus allocated freight and handling is ₹214 per unit, before considering any other directly attributable costs or applicable accounting adjustments.
3. Different Methods of Freight Cost Allocation
Not every shipment should be allocated equally across all units. The allocation method should reflect the factors that drive the transportation cost.
Method 1: Equal allocation per unit
Formula: Total Freight Cost ÷ Total Units
Suitable when units are reasonably similar in size, weight and handling requirements.
Method 2: Allocation by weight
Formula:
Product Freight Cost = Total Freight Cost × Product Weight ÷ Total Shipment Weight
Example: Total freight is ₹20,000. A product represents 25% of the shipment’s total chargeable weight.
Allocated freight = ₹20,000 × 25% = ₹5,000
Method 3: Allocation by volume
Formula:
Product Freight Cost = Total Freight Cost × Product Volume ÷ Total Shipment Volume
This method may be useful when cargo space is a major cost driver, particularly for bulky but lightweight products.
Method 4: Allocation by shipment or delivery
Some businesses allocate freight according to the number of shipments, deliveries, orders or transport activities, where these measures reasonably reflect the costs incurred.
Use the allocation basis that best reflects the underlying cost driver. Weight, volume, distance, shipment count and units are not interchangeable in every situation.
4. Freight Cost as a Percentage of Sales
Businesses can also measure freight cost against sales revenue to understand the logistics cost burden.
Formula:
Freight Cost as % of Sales = Freight Cost ÷ Sales Revenue × 100
Example:
- Freight cost: ₹50,000
- Sales revenue: ₹10,00,000
Freight cost percentage = ₹50,000 ÷ ₹10,00,000 × 100
Freight cost = 5% of sales
This ratio can be compared across periods, product categories, customer groups or distribution routes. Comparisons are most useful when the underlying business mix and cost definitions are consistent.
5. Freight Cost and Product Profitability
Consider a product with the following costs and selling price:
| Particulars | Per Unit |
|---|---|
| Purchase cost | ₹200 |
| Inbound freight | ₹14 |
| Other product costs | ₹6 |
| Total cost before other operating expenses | ₹220 |
| Selling price | ₹300 |
| Gross profit before other operating expenses | ₹80 |
If freight is excluded from the product cost analysis, the reported product margin may appear higher than the actual economic margin.
Businesses should distinguish inbound freight, which may form part of inventory cost under the applicable accounting framework, from outbound delivery costs, which are generally assessed separately according to their nature and the relevant accounting policy.
6. Inbound Freight vs Outbound Freight
Inbound freight: Transportation of purchased goods from a supplier to the business’s warehouse or production location.
Outbound freight: Transportation of goods from the business to its customer or distribution destination.
The distinction matters because inbound freight may be included in inventory cost when directly attributable to bringing inventory to its present location and condition. Outbound freight is generally treated as a distribution or selling expense, depending on the circumstances and applicable accounting requirements.
7. How Businesses Can Reduce Freight Costs
- Compare transport providers using consistent service and cost assumptions.
- Consolidate shipments where this does not create unacceptable delays.
- Improve vehicle or container utilisation.
- Review delivery frequency and shipment size.
- Compare actual freight costs with budgets and historical trends.
- Evaluate total logistics cost rather than selecting a carrier based only on its quoted rate.
8. Use the Freight Costing Calculator
Use the calculator to analyse freight expenses and evaluate transportation costs for your business.
Open Logistics Freight Costing Calculator
Conclusion
Freight cost per unit helps businesses understand transportation costs at product level. By choosing an appropriate allocation method and including relevant logistics expenses in profitability analysis, businesses can improve pricing, supplier comparisons and supply chain decisions.
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