According to the terminology adopted by the Institute of Cost and Management Accountants in England, selling overheads refer to "the cost incurred in promoting sales and retaining customers." Additionally, distribution overheads are "the cost of the process which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty packages available for re-use." Selling overheads are all the costs associated with creating or stimulating demand or of securing orders. Examples of such overheads are sales office expenses, advertisements, the sales manager's salary, and travel expenses. Distribution overheads are all the expenses incurred from the time the product is finished in the factory until it is delivered to end consumers. Examples include warehouse rent, warehouse utility bills, maintenance for delivery vans, carriage on sales, and packing charges. 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 the approach adopted for factory overheads. In particular, they are classified according to their type, nature, or purpose, and separate cost account numbers are used for their codification. The following is a list of selling overheads: (1) Indirect Materials (2) Indirect Labor (3) Indirect Expenses The following are examples of expenses that can be classified as distribution overheads: (1) Indirect Materials (2) Indirect Labor (3) Indirect Expenses From the above lists, it is clear that selling overheads are related to the promotion of sales, whereas distribution overheads start when the order is received to supply the materials and end when the goods are dispatched to the customer. Although these overheads are separately accounted for, it is advisable to include them in the overall cost structure of the product. They should also be shown and included in the total cost of sales. 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 cases, the cost should also be spread over. The cost of advertisement of a permanent nature should generally be capitalized instead of included in the cost structure. However, advertisements for staff recruitment, inviting tenders, and legal public notices should be appropriated to concerned departments. Goods sold usually contain a clause pertaining to after-sales services. Selling overheads include the cost of after-sales services. These are for the stipulated guarantee period. Therefore, such costs should be analyzed and then charged accordingly. For example, if in after-sales service, a defective part is replaced, then the cost of the replaced part is charged to the production department. Warehouse 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 or other factors. Royalty is payable for the right to manufacture a product or use a piece of land for mining or other purposes. It is a direct charge and should be charged, and it is included in prime cost. However, if royalties are based on units sold, the cost is treated as a selling overhead. Insurance for transit risk is usually taken. If it is for a single product, then 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 it is usually apportioned on the basis of the sale value. Remuneration of salesmen may either be treated as fixed cost or variable cost. This is because salaries are a fixed expense, whereas commissions are a variable expense. Fixed expenses are apportioned to various products that the salesmen deal with, whereas the variable expenses are directly allocated to the products. Bad debts are financial losses and, as such, they should be excluded from cost accounts. However, as another opinion, bad debts should be included in cost accounts. However, if such a policy decision is taken, bad debts should be included in selling overheads. Market research cost is a selling overhead and should be treated as such. However, the management may decide to defer this cost and spread it over the period for which benefit of the research is likely to derive. For the purpose of absorption, selling and distribution overheads may be divided into two parts: 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 using any of the following bases: An overview of these bases is given in the rest of this article. Under this method, the total selling and distribution expenses (having already been calculated for a product) are divided by the estimated number of units of product to be sold. This yields the rate of selling expenses per unit. The overhead rate, under this method, is computed using the following formula: Overhead rate = Estimated selling and distribution expenses / Expected sales in units Under this method, the selling and distribution expenses are charged as a percentage of the work cost of articles sold. The overhead rate is calculated in advance based on the normal expenses and expected amount of work cost. The overhead rate is calculated using this formula: Overhead rate = (Selling and distribution expenses / Work cost) x 100 In this method, the overhead rate is expressed as a percentage of selling price. It is calculated based on the normal level of such expenses and the normal sales volume of the past. The following formula is used to calculate the overhead rate: Overhead rate = (Selling and distribution expenses / Total sales) x 100 This method of absorption assumes that the selling price would be known and can be adopted successfully where the products are sold at standard prices.Selling and Distribution Overheads: Definition
Selling and Distribution Overheads: Explanation
List of Selling Overheads
List of Distribution Overheads
Accounting Treatment of Selling and Distribution Overheads
Advertisement
After-sales Services
Warehouse Rent
Royalties
Transit Insurance
Remuneration of Salesmen
Bad Debts
Market Research Cost
Absorption of Selling and Distribution Overheads
1. Estimated Rate per Article
2. Percentage of Work Cost
3. Percentage of Selling Price
Selling and Distribution Overheads FAQs
Selling and distribution overheads are the costs associated with selling and distributing your product or service. This can include marketing, advertising, sales commissions, shipping, and more.
Selling and distribution overheads can have a significant impact on your business, especially if you have a large number of products or services to sell. If your overheads are too high, it can eat into your profits and make it difficult to compete against other businesses in your industry.
There are a number of ways you can reduce your selling and distribution overheads, including outsourcing your sales and marketing, automating your shipping process, and offering discounts or promotions. You should also look for ways to streamline your operations to reduce the overall cost of selling and distributing your products or services.
It includes indirect materials, indirect labor and indirect expenses
There are a few ways you can reduce your distribution overheads, such as using energy-efficient appliances and conserving electricity. You can also contact your utility company to see if they offer any programs that can help lower your costs.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
