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What is Absorption of Selling and Distribution Overheads

Absorption of Selling and Distribution Overheads
Absorption of Selling and Distribution Overheads

Absorption of Selling and Distribution Overheads

Selling costs or overhead expenses are those incurred for the purpose of promoting the marketing and sales of different products, e.g., advertisement, price list, salary of salesman, etc. Distribution expenses, on the other hand, are expenses relating to delivery and dispatch of goods sold e. g.. packing expenses, carriage outward, go down rent, insurance of finished product etc.

What is Selling Cost

The cost of seeking to create and stimulate (sometimes termed ‘marketing‘) and of securing orders.

ALSO READ- What is Meaning of Overhead | Classification of Overhead

What is Distribution Cost

The cost of the sequence of operations which demand begins with making the packed product available for dispatch and ends with making the preconditional returned empty package, if any available for re-use From the above, it is clear, that the two types of expenses represent two distinct types of function.

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.

These expenses can be absorbed on any of the following:

(i) Perception factory coat: 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 ankles are produced. This method will not take into consideration if different efforts involved in selling unless the effort is in the same proportion as the cost of production.

ALSO READ- What is Overheads | Bases For Allocation of Expenses to Departments

In form of formula:

Absorption Rate= Total Selling and Distribution Overheads / Factory Cost x 100

(ii) 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

=10 / 90 or 1 / 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 nor give good results.

ALSO READ- What is Re-Apportionment of Service Departments Overheads | Basis of Re-Apportionment

Absorption Rate= Total Selling and Distribution Overheads / Total Sales x 100

(iii) 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, where there are more than one product.

Absorption Rate= Total Selling and Distribution Overheads Estimated / units to be sold x 100

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