Distribution Costs – Meaning, Accounting and More

By | January 7, 2022

When you ask how much the distribution costs ? This is a simple but important question that every entrepreneur should ask. 

Distribution costs are costs that must be borne by an entity or individual to bring a product to the market. It doesn’t always have to be a large amount of rupiah, sometimes it can be a little more or a little less depending on the size and scope of distribution. These costs can also depend on the type of product you are distributing. Distribution costs can also be called the price that distributors or manufacturers pay for their products.

What does distribution cost mean?

Distribution costs or distribution costs are costs incurred by a company to make its goods or services available to end users or retailers . It is a broad accounting term  that includes several types of expenses.

Some examples of these costs are costs of moving goods to retailers and end users, warehousing costs, transportation costs and tolls, maintenance of transport vehicles and others.

Distribution costs can be a significant part of a company’s total costs, especially in scenarios when goods are perishable, or the volume of goods is large or when end users are in remote areas.

It is important to note that distribution costs are different from selling and marketing costs. Distribution costs mainly include shipping and logistics costs. Meanwhile, sales and marketing costs include marketing staff salaries, sales commissions, and advertising costs.

Distribution Fees – What’s Included?

As said above, this distribution cost is a broad term for many types of costs. Distribution Costs include all costs to ship the product to an end user or retailer.

That is, all shipping costs at each stage (from the production facility to the retailer or end user) will be part of the distribution costs. It is possible that the manufacturer may have production facilities in one location and pick-up points for shipping agents in another.

The costs incurred by the company for shipping goods from the production facility to the pickup destination will also be part of the distribution costs.

Inventory handling costs at each stage of delivery are also part of distribution costs. This will cover handling costs at the production facility, pick-up point, warehouse and point of sale.

Likewise, packaging costs and distribution managerial costs are also part of distribution costs. Administrative distribution costs will include salaries, as well as distribution manager office costs .

Another important component is shipping costs. Shipping costs can take various names depending on the distance the company ships the product. For example, if a company manufactures and sells products in one country, then shipping costs could mean “Truck” costs.

If a company exports a product, then it will be “Air Freight or shipping charges for a container load or less than a container load. The thing to note is that shipping by air is more expensive than via LCL. But, air transportation will take less time.

Overall, we can say that distribution costs include shipping costs; packing cost; shipping costs; storage costs; handling fees; and distribution employee costs.

Accountancy

All distribution costs are usually indirect and are included in  the income statement.   They are shown next to selling expenses, under the heading of selling and distribution expenses. The thing to note is that the accounting treatment of distribution costs is the same as for other costs.

We need to subtract the total distribution costs from  gross profit  to arrive at  net profit .

For example, the company I am very kindhearted has sales of Rp. 20,000,000, while the cost of goods sold (HPP) is Rp. 10,000,000. Transportation costs are IDR 2,000,000, distribution manager salary is IDR 2,000,000. The net profit in this case is IDR 6,000,000 (Rp 20 million minus IDR 10 million minus IDR 2 million minus IDR 2 million).

Sales Rp 20 million

Less: HPP Rp 10 million

Gross Profit                                                      Rp 10 million

Less: Distribution Cost Rp 4 million

Net Profit                                             Rp 6 million

How to Minimize Distribution Costs?

As said above, the goal of every business should be to minimize its distribution costs. Because minimizing distribution costs will allow it to maximize its profits. In addition, a company also wants to cut its distribution costs to survive a tight price war.

A company can reduce distribution costs by using the following methods:

  • Avoiding small shipments can save a company a lot of money. Instead of sending several small shipments, a company can send one large shipment.
  • One important factor for increasing distribution costs in general is a higher sales return quantum. Therefore, companies should strive to reduce sales returns to control and reduce costs.
  • Companies should not rely on one logistics provider. It should continue to negotiate terms with the logistics provider to get the best deal.
  • The use of technology, machines, and automation tasks can also help companies lower their distribution costs.
  • Doing a comparative analysis of demand and how urgent customer needs are will also help.
  • Avoiding storing the finished product for a longer time also reduces distribution costs. In other words, production is so closely aligned that there remains a minimum time gap between production and delivery.

Additional Useful Words

Companies need to balance distribution costs with product demand. The company’s goal should be to minimize distribution costs.

For that, the company needs to do a comparative analysis of how urgently the product is needed, and whether it will lose sales because of it.