What is Distribution Cost?
Distribution cost is the sum total of all those expenses which are incurred by the producer of a product in order to make possible the delivery of the product from its location to the location of the end customer. Thus, for a manufacturer, it includes all those expenses which are incurred to make possible the delivery of the product from its production site to the customer’s location, whether retailer, wholesaler or the final customer.
Explanation
An item is manufactured at the production site, say factory, and are then kept at the warehouse for their distribution to the potential customers afterwards. To deliver the product from the warehouse to the customer’s location, the producer may be incurring several expenses, including but not limited to shipping costs. Thus, it includes all those expenses which are necessarily incurred for making the delivery to the customer. The same is usually recovered from the customer by way of adding the same in the per-unit price of the product.
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Source: Distribution Cost (wallstreetmojo.com)
Distribution Cost Examples
#1 – Freight Cost
Freight Cost refers to the transportation expenses which are incurred for transferring the product from the manufacturer’s location to the customer’s location. It can either be incurred by the customer itself or maybe first incurred by the manufacturer and then recovered from the customer by way of including the same in the price of the product.
#2 – Storage Cost
The products, once manufactured, are kept for storage at the warehouse until they are sold to the customer. A manufacturer incurs expenses concerning the storage of the products in the warehouse, such as warehouse rent, which forms part of the distribution cost.
#3 – Product Handling Cost
It includes costs related to the maintenance of the products kept at the warehouse. It will consist of all those expenses which are incurred to maintain the quality of the product and to keep them in good condition.
#4 – Direct Selling Expenses
A manufacturer may incur expenses directly in relation to selling the product or to attract customers to buy the products. Examples of such expenses include a salary of marketing personnel (only who are involved in targeting customer sales), training costs, office expenses necessary for sales, etc.
#5 – Advertisement Expenses
Advertisement expenses also form part of the distribution costs. Such cost helps a manufacturer, especially to develop its presence in new areas. Examples may include amounts spent on advertisements done by way of hoardings, newspapers, media channels, and so on.
#6 – Managerial Personnel Cost
Apart from these costs, this may also include other expensesExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more such as the cost of managerial personnel involved in warehouse management, packaging cost, and so on.
Benefits of Distribution Cost
- When a manufacturer develops an efficient distribution system, it enables it to obtain a competitive edge over others. It is because such a manufacturer will be able to fulfil its delivery commitment to its customers in time and much quicker.
- The quality of the products is improved by incurring costs such as packaging costs, quality control costs, and so on.
- The customers can take advantage of better-quality products, and the manufacturer enjoys goodwillThe Manufacturer Enjoys GoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more.
- The trust of customers is increased when distribution costs, such as transportation costs, are directly met by the manufacturer.
Importance
The costs that are incurred over the distribution network of a manufacturer helps it in its customer building and customer management. It is so because the costs will keep the products look presentable and thereby enhance sales. Also, there are several distribution networks one may follow, which will help in the quicker and smooth delivery of the products. If a company engages a proper distribution network, it also helps it to target specific audiences and mass audiences.
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