Distribution cost is the sum of all expenses (direct and indirect) incurred by any company, firm, individual, or any other entity to deliver their products from the production department to the end consumer. Distribution costs are also known as distribution expenses and they are records in the income statement of the entity by using the same accrued concept the same similar to other expenses.
The same as other operating expenses, distribution costs are also records in the income statement of the entity during the period the costs are incurred.
Distribution costs mainly consist of transportation expenses like:
- Fuel and toll expenses
- Any logistic expenses
- Warehouse expenses including handling of inventory
- Repair and maintenance of vehicles used for transportation purpose
From the above definition, we can say that the sum of all costs incurred in respect of transporting of a product from the production department to the distributor, distributor to retailer, and from retailer to end consumer would be included in total distribution costs.
In some companies, there is a reasonable distance between the company’s production department and its warehouse. The cost of transporting a product from the production department to a warehouse will also include in the total distribution costs.
Here note that distribution expenses are different from selling and marketing expenses. It is mainly concern with logistics, shipping, and insurance while the selling and marketing expenses are mainly concern with the advertisement, commission, and salaries of marketing staff.
Accounting for distribution costs:
All distribution costs are considered indirect expenses and come under the head of selling and distribution expenses in the company’s profit and loss statement. You may not be able to see it in the face of financial statements, but you surely could see it the note to financial statements. Specifically, note to the selling and distribution expenses.
The total distribution costs are deducted from the company’s gross profit to calculate the net profit or loss of the company for the period.
Note that there is no difference in accounting treatment for distribution costs and other expenses. Distribution costs are only records in the income statement and they are no records in the balance sheet as well as other financial statements like a statement of change in equity as well as a statement of cash flow.
The double entry for distribution costs is really simple. For example, if the distribution costs is incurred but the company have not paid by cash yet, the entry should be:
Dr Distribution costs
Cr Accrued/distribution costs on distribution costs/
And if they company paid by cash for those distribution costs that incurred, then the entry should be:
Dr Distribution costs
Example from the Real World:
Company ABC has a revenue of $50,000 for the month of February 2020. The cost of goods sold for the period is valued at $40,000.
Fuel and other transportation costs for the period are amounting to $3,000 while the salary of a marketing manager is $5,000.
Required: Profit and loss statement for ABC Company for the month of February.
Profit and Loss Statement
For the month of February 2020
Cost of Goods Sold ($40,000)
Gross Profit $10,000
Selling and Distribution Expenses
Marketing Expenses ($5,000)
Distribution expenses (fuel & transportation) ($3,000)
Net Profit / Loss $2,000
How to Reduce Distribution Costs?
With the increase in completion in every industry, manufacturers and distributors want to cut down their expenses to meet the cut-throat price war in the market. One of the main stakeholders in product costs is the distribution costs.
If a business manages its distribution costs efficiently, it may save a lot of money. But the question is how they can minimize their distribution costs?
After a lot of research experts found that if businesses successfully implement the following strategies, they may save a considerable amount of money:
- Try to avoid small shipments- it can be done by consolidate load with other firms or even with your competitors for the same location or customer.
- Adopting to Cross-dock freight
- Avoid sales returns by providing incentives or lowering costs.
- Try to package your product in the distribution center according to your customer needs.
1) Does distribution cost consider as the cost of sales?
- No, it is generally classify under general and administrative expenses
2) Does distribution cost record in balance sheet?
- No, it is the expenses and record in the income statement in the period it is incurred.