Selling costs or overhead expenses are those incurred for the purpose of promoting the marketing and sales of different products. Distribution expenses, on the other hand, are expenses relating to delivery and dispatch of goods sold. Examples of selling and of distribution expenses have been considered earlier in this Study Lesson. From the above, it is clear that the two types of expenses represent two distinct types of functions. However, it is usual to group together these into one composite class, namely, selling and distribution overhead, for the purpose of cost accounting. Such a course has the merit of simplicity.
- Absorption of selling and distribution expenses: If selling and distribution expenses are small, they may be included in office expenses. If these expenses are considerable, one of the following magnitudes may be followed:
- Percentage of works cost: In this method, on the basis of past year’s experience the percentage of selling expenses to works cost is ascertained and used for finding out the selling and distribution expenses to be charged to each job or product. This method can be followed successfully if one product is produced or where selling expenses are small though various articles are produced. The method will not take into consideration different efforts involved in selling unless the effort is in the same proportion as the cost of production.
- A percentage on the selling price: From an analysis of past year’s accounts one can determine the percentage which normal selling and distribution expenses bear to the normal turnover. Suppose, on the basis of the previous year’s experience it is ascertained that selling expenses are 10% of the turnover, and the cost of production is 9,000, then
10 /100 −10 i.e. 90 or 9 of the cost of production will be charged as selling and distribution expenses. This method can be followed in those cases, where the products are sold at fixed prices and the selling price of each article is known. If prices fluctuate, the method will not give good results.
An estimated rate per unit
If there is only one product, the total estimated selling expenses can be divided by the total estimated number of unit to be sold to give the selling on cost per unit. It would be better if constant and variable expenses are separately treated, if there is more than one product.