Selling and Distribution Overheads

Definition of Selling and Distribution Overheads

According to the terminology adopted by the Institute of Cost and Management Accountants, England, the selling overheads constitute the cost incurred in promoting sales and retaining customers and the distribution overheads constitute the cost of the process which begins with making the packed product available for despatch and ends with making the reconditioned returned empty packages available for re-use.

Explanation

Selling Overhead refers to all costs of seeking to create and stimulate demand or of securing orders e.g., sales office expenses, advertisement, salary of sales manager, traveling expenses, rent of show-room etc. Distribution overhead refers to all expenses incurred from the time the product is finished in the factory till its delivery to ultimate customers or consumers e.g., rent of warehouse, the lighting of the warehouse, running and maintenance of delivery vans, carriage on sales, packing charges etc. For the purpose of distribution, selling and distribution overheads are taken together.

The classification, codification and collection of selling and distribution overheads are done in a manner similar to one adopted for factory overhead. Selling and distribution overhead costs are classified according to their type, nature or purpose. Separate Cost Account Numbers are used for their codification.

List of Selling Overheads

Advertisements

The following is the list of selling overheads:

(1) Indirect Materials

  • Cost of Printing and Stationery used in marketing.
  • Mailing cost of literature, catalogs, price lists, letter of offer, etc.

(2) Indirect Labour

  • Salaries, commission, etc. of sales staff including sales organisers, salesmen, etc.
  • Salaries, commission, allowances, etc. of technical representatives, sales executives, etc.

(3) Indirect Expenses

Advertisements
  • Advertising Expenses,
  • Bad Debts
  • Rent of the showroom.
  • Travelling and Entertainment expenses.
  • Expenses on branch establishment.
  • Expenses for sales office.
  • Fee of directors etc. who are incharge of sales.

List of Distribution Overheads

The following are the expenses which can be classified as distribution overheads.

(1) Indirect Material

  • Cost of packing and packages,
  • Cost of oil, grease, spare parts, etc. used in maintailiing the delivery vans.

(2) Indirect Labour

  • Wages of packers etc.
  • Wages of van drivers etc.
  • Wages of despatch clerks etc.

(3) Indirect Expenses

  • Godown Expenses.
  • Rent, Insurance, etc. of the godown.
  • Carriage outwards.
  • Other transport charges.
  • Depreciation of Delivery vans etc.
  • Running cost of Delivery vans etc.

From the above lists, it is clear that selling overheads are related to the promotion of sales and distribution overheads start when the order is received to supply the materials and it ends when the goods are despatched to the customer. Though these overheads are separately accounted for but it is advisable that they should be included in the overall cost structure of the product and should be shown as and included in the total cost of sales.

Accounting Treatment of Selling and Distribution Overheads

Advertisement

Advertisement is a sales promotion expenditure. Hence it is a selling overhead. When advertisement expenditure is incurred on an individual product it should be allocated to the product concerned. However, when common advertisement expenditure is incurred, the cost, therefore, needs apportionment on the basis of sales turnover. Heavy advertisement expenditures are spread over to different coming years.

In such a case the cost should also be spread over. Cost of advertisement of permanent nature should generally be capitalized instead of including it in the cost structure. But advertisement for staff recruitment, inviting tenders, legal public notices should be appropriated to concerned departments.

After Sales Services

Goods sold usually contain a clause pertaining to after-sales services. Selling overheads include the cost of after-sales services. These are for stipulated guarantee period. Therefore, such costs should be analyzed and then charged accordingly. Say, if in after-sale service a defective part is replaced, then the cost of such a defective replaced part is charged to the production department.

Warehouse Rent

Such a rent is apportioned to various products on the basis of floor area used, the number of packages warehoused or any other basis depending upon technical estimates, etc.

Royalties

Royalty is payable for the right to manufacture a product or use a piece of land for mining etc. It is a direct charged and should be charged as such and is included in the prime cost. However, if royalties are based on units sold, the cost is treated as selling overhead.

Transit Insurance

Insurance for transit risk is usually taken. If it is for a single product, the whole amount is charged to the product insured, if however, it is for more than one product, it should be apportioned to all the products for which the insurance is taken and is usually apportioned on the basis of the sale value.

Remuneration of Salesmen

Remuneration of salesmen’s may either be treated as fixed cost or variable cost. Salary is a fixed expense. The commission is a variable expense. Fixed expense is apportioned to various products dealt with the salesman. Variable expense is directly allocated to the products.

Bad Debts

Bad debts are financial loss and as such, they should be excluded from cost accounts. But another opinion is also there that debts should be included in the cost accounts. However, if such a policy decision is taken, bad debts should be included in selling overhead.

Market Research Cost

Market Research Cost is selling overhead and should be treated as such. However, if the management decides to defer it and spread it over a period over which the benefit of research is likely to derive.

Absorption of Selling and Distribution Overheads:

For the purpose of absorption, selling and distribution overheads may be divided into two parts:

(i). Expenses which are incurred on the sale of products only and can be directly related to the items sold.

(ii). Expenses which are fixed over time and do not depend on sales volume.

Items belonging to category (i) can be directly added to the cost of production so as to arrive at the cost of sales. But items under category (ii) may be charged to products on the basis of any of the following bases:

  1. An Estimated Rate per Article.
  2. A Percentage on Work Cost.
  3. A Percentage on selling Price.

(1). An Estimated Rate per Article:

Under this method, the total selling and distribution expenses having been ascertained for a product, are divided by the estimated number of units of product to be sold in order to arrive at the rate of selling expenses per unit. The overhead rate, under this method, is computed by applying the following formula:

Overhead Rate = Estimated Selling and Distribution Expenses / Expected Sales in units

(2). A Percentage on Works Cost:

Under this method, the selling and distribution expenses are charged as a percentage on the works cost of articles sold, The overhead rate is computed in advance on the basis of the normal expenses and expected amount of work cost. The overhead rate is computed by applying the following formula:

Overhead Rate = (Selling and Distribution Expenses / Work Cost) x 100

(3). A Percentage on Selling Price:

Under this method, the overhead rate is expressed as a percentage of selling price and is calculated on the basis on the normal level of such expenses and normal sales volume of the past. The overhead rate is computed by applying the following formula:

Overhead Rate = (Selling and Distribution Expenses / Total Sales) x 100

This method of absorption assumes that selling price would be known and can be adopted successfully where the products are sold at standard prices.

 

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