FOB Destination
This article covers meaning, types & example of FOB Destination from operations perspective.
What is FOB Destination?
FOB (Freight on Board) destination is a concept in shipping that means the seller would hold the responsibility and control of the goods until they are delivered to the buyer at a destination point after which the control and ownership is transferred to the buyer as per the agreement between the parties. Generally the seller incurs all the shipping costs in FOB destination arrangements and will be held responsible for the replacement of the damaged goods. The overall transportation costs, risk are beard by the seller for which FOB destination appear in the balance sheet of the seller not the buyer. It is also known as Free on Board Destination.
Types and Variations of FOB Destination
But there are some variations on FOB destination terms as follows –
a. Freight Prepaid and Allowed where seller is responsible for the freight charges and can file claims if any.
b. Freight Prepaid and Added where the seller pays the freight charges and add it to the buyer’s invoice.
c. Freight Collect where the buyer pays the freight chargers after receiving the goods.
d.
Freight Collect and Allowed where buyer pays the freight charges after he received the goods but he deducts the cost from the supplier’s invoice.
FOB Destination is one of the two types of FOB (Free on Board), the other being FOB Origin.
Advantages and Disadvantages of FOB Destination
Some advantages are:
1. Buyer will not be responsible for any shipping costs of the goods and their damage if happens.
2. Buyer will not be held responsible for any loss in-transit.
Certain disadvantages of FOB Destination are:
1. Sellers will not be able to recover any loss once the goods have been on-boarded.
2. Seller needs to make certain arrangements for getting export permissions.
Difference Between FOB Destination & FOB Origin
FOB Destination is different from FOB Shipping (FOB Origin) as in FOB shipping, the ownership and the transfer of the goods happen when the goods are at the shipping point and the seller will not be further responsible for delivery of the goods and damaged caused if any.
Similarity Between FOB Destination Vs DDP (Delivered Duty Paid)
DDP is an agreement between the seller and the buyer where both the parties agree to certain terms and conditions before finalizing the transaction. In this, the seller is responsible for all the cost incurred in transporting the goods from the source to the destination which includes shipping costs, insurance, import and export duties, taxes etc.
Example of FOB Destination
Let’s assume that the seller had priced an item for $500 FOB destination and the goods were loaded in the delivery vehicle on the 1st Feb’19. Suppose the goods were present in that carrier for until 5th Feb’19 after which they are unloaded at the buyer’s destination point. So until 5th Feb’19, the goods belong to the seller and that it will be counted in seller’s inventory.
Once the product is received by the buyer, then the ownership gets transferred. Then the buyer records the transaction and increase in inventory on 5th Feb’19. But if the seller had priced the same item for $500 FOB shipping point and the goods were loaded in the delivery vehicle on the 1st Feb’19, then the buyer would have recorded the purchase and increase in inventory on the very same date.
Hence, this concludes the definition of FOB Destination along with its overview.
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