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What is the Differences between FOB (Free On Board) and CIF (Cost, Insurance, and Freight)

What is the Differences between FOB (Free On Board) and CIF (Cost, Insurance, and Freight)

Despite the fact that both phrases are commonly used in international trade, there are fundamental variations between FOB and CIF. Unfortunately, most individuals, especially the general public, are still unaware of the differences between FOB and CIF.

It is very important to understand the export and import distribution channels, as well as the difference between FOB and CIF, because it is useful in the international trading process. Because the duty and risk of the items being disseminated is incorporated in this procedure.

In order to more clearly understand the difference between FOB and CIF, let's discuss what CIF and free on board (FOB) are:

What is CIF (Cost, Insurance, and Freight)?

CIF

Before you can understand the distinction between FOB and CIF, you must first understand what CIF stands for: Cost, Insurance, and Freight. CIF is defined as a payment mechanism in which the exporter assumes responsibility for the product's shipping costs until it arrives in the destination country.

CIF comprises fees for products insurance, freight loading and unloading, shipping, and goods procurement. The exporter will be responsible for any damage or loss of goods.

As a result, when the items arrive in the target country, the price of the goods is extremely high because it contains the above-mentioned additional expenditures. 

Despite its high cost, CIF is quite useful and gives importers peace of mind about the quality of their goods. Because there are no insurance expenses, shipping costs, or other expensive documentation to worry about.

What is FOB (Free On Board)?

FOB

Furthermore, to distinguish between FOB and CIF, the term "free on board" or "FOB" refers to an international standard that governs buying and selling operations involving maritime transportation. Free on Board, or FOB, can be described as a worldwide chamber of commerce.

In general, Free on Board (FOB) is a condition that both parties (seller and buyer) have agreed to, with the proviso that the price is computed based on the accumulated worth of the items and that all costs are absorbed until the goods get on board (on board).

The cost of loading the port onto the ship's cargo, the cost of commodities to the ship, the cost of distribution from the warehouse to the dock, and customs taxes are all included in the FOB price. 

Buyers should note that FOB fees include insurance, port loading and unloading costs, and only transportation costs to the warehouse.

Examples of FOB vs CIF Differences Implementation Cases

To understand more deeply about the differences between FOB and CIF, the following are examples of FOB and CIF implementation cases that can be studied:

Company ABC trades cosmetic raw materials to Company XYZ which is overseas. The agreed price is $150 per kg. The two then signed an FOB of $150 per kg.

This means that Company XYZ as the importer will pay $150 per kg to Company ABC as the exporter. Additional costs that must be paid by Company XYZ include shipping costs, insurance costs, etc.

Furthermore, Company ABC and Company XYZ also agreed to use the CIF system. So, Company XYZ will pay customs fees, distribution/transportation costs, insurance costs, and the procedures will be handled by Company ABC so that the delivery of goods can be on time and the quality is maintained according to the agreement.

Please note that, sometimes there is a difference in the calculation value of the difference between FOB and CIF. 

Therefore, the company must take into account in detail the possible costs that will be incurred by Company ABC as an importer when implementing free on board (FOB) or cost, insurance, and freight (CIF). That way the difference between FOB and CIF in business will get more leverage in cost efficiency.

Well, that's the review of the difference between FOB and CIF. In the international trade export and import business, it is very important to choose the right system so that the company can more easily achieve success. Especially, in terms of financial budget management.

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