Delivery expense, also called freight-out or transportation-out, is the cost a seller incurs getting merchandise to its customers, recorded as an operating expense, specifically a selling expense, on the income statement during the period the delivery cost is incurred. This is distinct from the cost of acquiring the merchandise in the first place, and it is never added to inventory cost, since by the time delivery occurs the sale has already taken place.
When a seller incurs delivery expense
A seller incurs delivery expense whenever it ships goods to customers under terms of FOB destination, meaning the seller is responsible for getting the goods all the way to the buyer's location and bears the shipping cost itself. Under FOB shipping point terms, by contrast, the buyer bears the shipping cost from the point of shipment onward, recording it as freight-in added to the cost of its own purchased inventory rather than as the seller's delivery expense.
Why delivery expense is an operating expense, not part of cost of goods sold
Delivery expense is recorded as a selling expense rather than folded into cost of goods sold, since the cost of shipping a product out to a customer after it has been sold is a cost of making the sale happen, not a cost of acquiring or producing the merchandise itself. This distinction matters directly for gross profit, which would be understated if delivery expense were mistakenly included within cost of goods sold rather than reported separately as an operating expense below the gross profit line.
How businesses manage and track delivery expense
Businesses with significant shipping volume often negotiate carrier contracts specifically to reduce per-shipment delivery cost, and some choose to pass delivery expense directly through to customers as a separate shipping charge, in which case the amount collected from customers is recorded as revenue while the actual cost paid to the carrier remains recorded as delivery expense, with the difference between the two effectively functioning as a small additional profit or loss on the shipping itself. E-commerce and mail-order businesses, in particular, track delivery expense closely as a percentage of sales, since it can represent a meaningful and highly variable cost that directly affects overall profitability as shipping rates and fuel costs fluctuate.
Why rising delivery expense matters to analysts
A business whose delivery expense is growing faster than its sales revenue is facing margin pressure from its shipping costs specifically, which analysts distinguish from pressure coming from product costs or pricing, since the appropriate response — renegotiating carrier rates, adjusting shipping policies, or passing more of the cost on to customers — differs considerably from how a business would respond to rising product costs or weakening prices elsewhere in its operations.
A simple worked example
An online retailer ships $500,000 worth of orders in a month under free-shipping promotions, paying carriers a total of $35,000 to deliver them, which is recorded entirely as delivery expense, a selling expense, rather than added to the cost of the goods shipped. If the retailer instead charged customers a separate $20,000 shipping fee for some of those orders, that $20,000 would be recorded as revenue, while the full $35,000 of actual carrier cost would still be recorded as delivery expense, leaving a $15,000 net cost the retailer absorbed on shipping for the month.