Distribution Costs: Definition, Examples, Accounting, Journal Entry, Importance

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Most companies focus on the cost of their products or services. Usually, these include direct and indirect production costs, including material, labor, and overheads. These determine a product’s profitability after deducting those costs from the sale price. However, they do not show how profitable the company is because other expenses may also play a role.

Companies must deduct various other costs from their gross profits to determine their earnings for a period. One of these includes distribution cost, which occurs after a company incurs its production costs. Therefore, it is crucial to know what these costs are.

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What are Distribution Costs?

Distribution costs refer to expenses a company incurs to sell or market its products. Sometimes, they are crucial to delivering the final product to the customer. Some customers may also require companies to pay delivery charges. However, distribution costs don’t include freight or delivery expenses. They also contain other selling and marketing costs incurred in helping the company market its products or services.

Generally, any expenses a company incurs in helping make goods and services available for a customer to reach falls under distribution costs. However, these costs vary from one company to another and between various industries. In some sectors, distribution costs may be significantly high to help companies deliver goods to customers. In others, these costs may be nil or minimal.

How to account for Distribution Costs?

The accounting for distribution costs is straightforward. It involves recording the expenses when they incur. On the other hand, it also entails recognizing a liability or decrease in assets for the settlement side. However, it is the presentation of distribution costs that may be complex. More specifically, companies must understand how to present these costs on the income statement.

Usually, distribution costs appear as a separate line item on the income statement. However, companies must decide the subheadings to include within this head based on the definition of distribution costs. On top of that, it is also crucial to deduct distribution costs from gross profits. Although these may include expenses necessary to make finished goods available to customers, they don’t constitute product costs.

What is the journal entry for Distribution Costs?

The journal entry for distribution costs is straightforward. As stated above, it requires recording the expense in the relevant account. On the other hand, the journal entry must also include the other aspect of those expenses. Overall, a typical distribution cost journal entry will look as follows.

Dr Distribution cost
Cr Cash or Bank or Accounts payable

Why are Distribution Costs important?

Distribution costs are expenses that companies must keep to a minimum. However, that does not imply that they are unnecessary. On the contrary, distribution costs are sometimes linked to higher sales. Customers are more likely to buy from a supplier that delivers goods and markets them than ones that don’t.

On top of that, distribution costs help companies reach more customers. These costs are crucial in making the products or services more presentable and in demand. On top of that, distribution costs also help satisfy and retain existing customers. However, companies must ensure that these costs do not exceed a specific limit.

Conclusion

Distribution costs include expenses necessary to market and sell a product. These costs are crucial in helping companies sell more and reach more customers. In accounting, these costs are similar to other expenses. However, they appear under a different line item in the income statement. Although they are costs, distribution costs are essential for some companies in the long run.

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