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Selling and Distribution Overheads

Commonly, selling expenses, publicity expenses & distribution expenses are known as marketing cost.

Marketing Cost: Cost which is incurred for the purpose of publicizing & presenting the product of the undertaking to the customers at an acceptable prices & suitably attractive forms, along with all relevant research work’s costs, the securing of order, & usually, delivery of the goods to the customers are represented by marketing cost. Cost of after-sale service & /or processing of order, may also be included in certain cases.

Selling Cost: That portion of marketing cost is indicated by selling cost, which is incurred for the purpose of securing orders.

Publicity Cost: That portion of marketing cost is indicated by publicity cost, which, as aids to the sale of goods or services, is incurred for the purpose of advertising & sales promotion.

Distribution Cost: That portion of marketing cost is indicated by distribution cost, which is incurred for warehousing of the saleable products & products delivery to the customers.

  • Features of Selling & Distribution Overhead:

The principal features of selling & distribution overhead are mentioned below:

1. Nature of expenses wise analysis: We are able to find remuneration, packing expenses, charges related to freight & duty, direct materials costs, fixed charges, sales promotion, miscellaneous allowances & discounts etc.

2. Operational functions wise analysis: Expenses related to direct selling, transportation cost, credit & collection expenses, costs related to advertising & sales promotion, warehousing & storage charges, financial, general administration & miscellaneous.

3. Products or Group of product wise analysis:If a number of products are produced by a concern, then analysis of selling & distribution overhead will be done by products or group of products.

4. Sales area or division wise analysis: On the basis of area of sales, analysis of selling & distribution overhead may be done.

5. Salesmen wise analysis:On the basisof salesmen, analysis of selling & distribution overhead may be done.

6. Distribution channel wise analysis: In this case, on the basis of whole-sellers, retailers & customers, selling & distribution overhead is analyzed.

7. Type of customer wise analysis: In this case, according to foreign customer, domestic customer, private customers, government customers, country retailers, country whole sellers etc., analysis of selling & distribution overhead is done.

On the basis of the above mentioned different ways, analysis of selling & distribution overhead can be done. Only, so much of the elaboration is desirable as would be suitable for the product type & the marketing method; as elaborate analysis is always expensive. In whatever way selling & distribution overhead has been analyzed, it is to form a part of the total cost of sales.  

Through the following processes, selling & distribution overhead are included in the total cost of sales:

(a) As far as practicable, allocation of expenses which are considered direct should be done to functions, products, salesmen, area etc.

(b) On some suitable basis, apportionment of other expenses which cannot be allocated directly (i.e. the general selling & distribution expenses) need to be done. Commonly used bases for the apportionment of selling & distribution overhead are given below:

Selling & distribution overhead                                             Base

1. Advertisement & sales promotion                 1. Where there is uniform selling price, on the basis of number of units sold, or else on the basis of sales value

2. Rent                                                              2. On the basis of space of the floor

3. Transport                             3.On the basis of weight or number of packages or distance carried or weight *                                                                              distance carried. 

4. Warehousing & shortage                             4. On the basis of sales volume, area occupied etc.

5. Insurance                                                     5. On the basis of property Value       

6. Credit & collection                                        6. Number of orders

7. Depreciation                                                 7. Capital value of assets.

8. General accounting                                      8.Number of orders or number of  transactions.

Absorption of Selling & distribution overhead:

  • (a) As a rate per article: For obtaining the rate per article, the total selling & distribution overhead are divided by the number of units sold. By this method, recovery of transport, advertisement etc. may be done. If there is uniformity in the units of sales, then this method becomes appropriate.(b) As a % of selling price of each article: By this method, recovery can be made of those expenses which are of fixed nature, like finance cost ,general administration cost & direct selling cost. By the analysis of the past records, the % is ascertained & can be worked out as below:

    Fixed selling & distribution expenses for the period * 100
    Total turnover for the period

    (c) As a % of works cost: Under this method, for the purpose of absorption of selling & distribution overhead, a certain % on works cost of the goods sold may be taken as a basis. By analyzing the past result, the % of selling & distribution overhead on the works cost can be worked out. Also, for absorption of selling & distribution overhead which are of fixed nature, this method is used.

    Rate per article method, of all the above discussed methods, is considered as best, particularly, when the units of production are uniform in nature.

    As per as accounting entries are concerned, to the selling & distribution account, all the selling & distribution overhead incurred are debited. Similarly, debit is given to cost of sales account & credit is given to the selling & distribution overhead account, for recovery of such overhead.

  • Control of Selling & Distribution overhead:

     Due to the under mentioned reasons, control of selling & distribution overhead is a very tough job:

    (a) It is not possible to exercise control upon the customers & competitors.

    (b) Correct estimation of market potential is difficult.

    (c) Fluctuations of market price does not always depends upon the cost factors.

    (d) It is not possible to predetermine correctly the capacity of any sales organization.

    However, for the purpose of control, the following methods should be adopted:

    (a) It is possible to prepare selling & distribution cost control reports & compare the results with the past records.

    (b) It is possible to prepare flexible budgets to show the expenses at different levels of activities & to compare actual figures with the budgeted figures.

    (c) It is possible to set up standards & to compare the actual expenses with the predetermined standards.

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