How to Calculate Distribution Cost
Distribution costs are the cost that company spends to bring the finished product from the warehouse to the customer location.
The manufacturer converts the raw material to the finished product in the factory. After the production is complete, these products may be stored in the warehouse near the factory. Or they may be stored in another warehouse near the sale destination.
The trading company is also required to store the products in a location that is ready to deliver to the customers.
After receiving orders from the customers, the company will prepare the package and deliver them to the customer’s location. During the delivery process, the seller will need to pay some expenses such as fuel, logistic cost, temporary warehouse & handling, and so on. The cost will depend on the location between seller and customers. These are the cost that will consider as the distribution cost.
From the definition we just looked at, it’s clear that a company’s total distribution costs would include the transportation from factory to the distributor, from the distributor to the retailer, and from the retailer to the customers.
Distribution cost will be recorded as an expense on the company income statement. The record is based on the period in which they are incurred by using the accrued basic.
Distribution costs are different from selling and marketing expenses. The distribution cost focuses more on logistics, and shipping insurance. Selling & Marketing expense includes advertisement, sponsorship, and salary of the sale team.
Journal Entry for Distribution Cost
The distribution costs are recorded on the income statement under the operating expense section. These costs will reduce the company sale to receive the net profit.
They will be present as the distribution cost line item. Some companies may record them under different line items. It depends on the detail of income statement and company practice.
The company records the distribution cost when the goods are delivered to the customers. The cost will record on the income statement.
The journal entry is debiting distribution cost and credit accounts payable.
| Account | Debit | Credit |
|---|---|---|
| Distribution Cost | $$$ | |
| Accounts Payable | $$$ |
The transaction will increase expenses on the income statement and increase accounts payable if they are not yet making payments to the supplier.
Example of Distribution Cost
As we know, there are many types of costs which considered as the distribution cost. These costs include the following:
Shipping cost
Shipping cost is the cost that a company spends to transport the goods from their own warehouse to the customers’ location. If the company has a warehouse from the factory, so it includes the cost of shipping from the factory to its own warehouse as well.
Packing Cost
During the transportation, the goods may require to pack in a special package. The packing will prevent the goods from any accident that can happen during the transportation. This cost is also part of the distribution.
Freight Cost
It is the cost that company spends when they need to transport the goods to oversea customers. It includes the air, truck, and shipping cost that are necessary to bring the goods to the final destination.
Storage Cost
It is the cost that company spends to store the finished goods before the customer purchase. The storage cost includes the storage in the factory and other warehouses. It is the cost of renting a warehouse, and other costs include.
Important of Distribution Cost
- When a company has an efficient distribution system, it can be more competitive because it can deliver the goods to customers on time without any issues.
- Incurring these costs not only helps improve quality but also ensures that the product you are selling is delivered in the proper package.
- When customers are assured that distribution costs will be paid for by the manufacturer, they have greater trust in their purchase.
How to reduce the cost
To stay competitive in today’s market, manufacturers and distributors want to reduce costs by any means necessary. One of the main ways they do this is through distribution expenses. The company wants to decrease shipping expenses all the way down. They want to reduce the rent for a building or trucking services that are needed when moving inventory around.
The cost of distribution can be minimized through effective management. This is important because it will save them money. There are some procedures that businesses can do to reduce the distribution cost such as:
- It is important to avoid small shipments because they can result in a lot of paperwork and extra cost for company. They should consolidate larger orders to improve efficiency, lower shipping costs, and reduce wait time between pick up/delivery locations.
- The company should try to reduce the return of the goods by providing incentives or lowering costs. This will make it more difficult for customers to request for refund and return the goods when they have an incentive to accept them.
- The company should distribute the correct products in the first place.
