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Distribution cost

A distribution cost is a cost that is incurred to warehouse, transport, or deliver a product or service. Distribution costs are expensed as incurred, managers should remember that these costs relate directly to products and services and should not adopt an “out-of-sight, out-of-mind” attitude about these costs simply because they have been expensed for financial accounting purposes. It is also known as distribution expenses. Distribution costs must be planned for in relationship to product/service volume, and these costs must be controlled for profitability to result from sales. Thus, even though distribution costs are not technically considered part of product cost, they can have a major impact on managerial decision making.

Distribution costs are also referred to the costs that are associated with the moving of a product from the production location to the point of consumption. This is a cost which is a part of doing a business. This means that the items are rarely made and sold in the same location, instead an item is made in a factory or other mass-production location.

Distribution costs are usually built in to the price of an item. For example let us assume that a retailer orders items from a warehouse, either the retailer or the wholesaler must pay the cost of moving those items to the retailer's location. If the distribution cost is paid by the wholesaler, then the wholesaler may charge the retailer more for the purchase of the item to pay for the cost of shipping. If the shipping cost is paid by the retailer, that cost is factored in when the item is priced for resale to the end user or consumer. The advertising and marketing costs are also considered part of distribution cost in many companies, since advertising is necessary to secure individuals who want to purchase the item.

Questions

  • What is a distribution cost?
  • How are distribution costs included in the business? Explain with an example.



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