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How do you classify and apportion selling and distribution overheads? How are the selling and distribution overheads absorbed by cost units?

How do you classify and apportion selling and distribution overheads? How are the selling and distribution overheads absorbed by cost units?

Owlgen
Course: B.Com

1 Answer

Selling and distribution overheads are classifies into the following sections:

Direct Selling Expenses:
  • Remuneration of salesman (salaries, bonus, commission, etc.).
  • Remuneration of technical staff (for products like machines, televisions, etc.).
  • Expenses of showrooms, sales dept., branches etc.
  • Expenses on sales quotations, tenders, estimating, etc.
  • After sale service costs.

Advertising and Sale Promotion: These expenses include cost of advertising (by newspapers, radio, etc.) pamphlets, free gifts, samples, exhibition and display, etc.

Transportation Expenses: The expenses related to transportation which includes upkeep of delivery vans, salaries of running and maintenance staff of delivery vans, and insurance of goods in transit.
Warehousing and Storage: It includes the cost of fished goods like warehouse rent, salaries of warehouse staff, packing costs of storage purpose and insurance of finished goods in warehouse.
Credit and Collection: Bad debts and debt collection expenses, legal expenses in connection with debt realization. Generally these expenses are treated as selling overheads.

Financial and General Administration: Costs such as royalty on sales, invoicing, accounts maintenance for selling and distribution sales statistics etc.

Allocation and Apportionment to Cost Centers: This is similar to apportionment of production overheads to cost centers. The selling and distribution overheads are apportioned to different cost centers like warehouse, transportation etc. Common bases for apportionment are as follows:

  • Expenses: Salesman remuneration, Basis > Direct allocation.
  • Expenses: Advertising: Door to door Radio, TV, press, Basis > Direct allocation.
  • Expenses: Show room expenses, Basis > Space used for value of sales.
  • Expenses: Insurance, Basis > Value of goods.
  • Expenses: Packing, Basis > Direct allocation.
  • Expenses: Catalogues, Basis > Direct allocation or space used.

Absorption of Selling and Distribution Overheads: After apportionment, these overheads must be absorbed by cost units. Selling and distribution overheads fall into two categories. These are as follows: (a) Those which and incurred only when the article is sold. They vary in direct proportion to sales value or volume of sales representing variable overheads. They represent a definite amount per unit sold and so charged accordingly. (b) Those which are incurred whether an article is
sold or not. They do not vary with units sold. They have to be absorbed in one of the following ways:

amazon
  • Rate per unit sold: The total selling and distribution overheads are divided by the number of unit sold to get a rate per unit. This method is followed when units sold are uniform.
  • Percentage of selling price: The formula for calculating percentage of selling and distribution expenses to sales is as follows:
    Selling and Distribution Overheads / SalesĀ  x 100.

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October 8, 2019
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