Distribution Overhead

Definition

Distribution Overhead (also referred to as “distribution cost” or “distribution expense”) encompasses all expenses associated with delivering a product from the point of origin to the final consumer. These expenses are essential for cost classification in accounting, enabling a business to determine the true cost of getting products to customers and are critical for pricing strategies.

Examples

1. Postage:

   • The cost associated with mailing packages to customers, including costs for postal services and shipping labels.

2. Transport:

   • Expenses incurred from using transport vehicles, including fuel, maintenance, and driver wages.

3. Packaging:

   • Costs related to materials and labor for packing products securely for delivery, such as boxes, cushioning materials, tape, and packing peanuts.

4. Insurance:

   • The cost of insuring products during transit to cover potential loss or damage.

Frequently Asked Questions

1. What is the difference between distribution overhead and manufacturing overhead?

   • Distribution overhead includes costs associated with delivering products to customers, whereas manufacturing overhead encompasses costs related to producing the product, like machinery maintenance, factory rent, and utilities used during production.

2. Can distribution costs be deducted from the taxable income?

   • Yes, distribution costs are typically considered ordinary business expenses and can be deductible from taxable income.

3. How is distribution overhead allocated in accounting?

   • Distribution overhead can be allocated using various methods, such as activity-based costing, where costs are traced to activities and products based on usage.

4. Are distribution expenses included in the cost of goods sold (COGS)?

   • No, distribution expenses are usually accounted for separately from COGS. COGS primarily includes costs directly tied to production.

5. Why is understanding distribution overhead important for businesses?

   • Accurate tracking of distribution overhead is crucial for setting product prices, managing budgets, and improving profit margins.

Related Terms with Definitions

1. Cost Classification:

   • The process of grouping costs according to their common characteristics.

2. Direct Costs:

   • Expenses that can be directly traced to a particular product or service, such as raw materials and labor.

3. Indirect Costs:

   • Costs not directly attributable to specific products or services, including utilities and administrative expenses.

4. Activity-Based Costing:

   • An accounting method that assigns costs to products and services based on the resources they consume.

5. Selling Expenses:

   • Costs incurred to market and sell products, such as advertising and sales commissions.

Online References to Online Resources

• Investopedia: Distribution Expense
• Accounting Coach: Distribution Cost
• Corporate Finance Institute: Activity-Based Costing

Suggested Books for Further Studies

1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
2. “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
3. “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
4. “Activity-Based Costing: Making It Work for Small and Mid-Sized Companies” by Douglas T. Hicks

Accounting Basics: “Distribution Overhead” Fundamentals Quiz

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