Distribution costs refer to the costs associated with moving a product from the production location to the point of consumption. This can mean the cost to move items from a warehouse to an individual, in the case of direct sales. It can also mean the cost of moving an item from a wholesaler to a retailer where the item is then sold to the end user.
A distribution cost is a part of the cost of doing business. Items are rarely made and sold in the same location. Instead, an item is made in a factory or other mass-production location.
The item is then shipped or transported from the area where it is made either to an end user or to a middleman who sells the product to end users. The methods of shipment vary depending upon the item and the structure of the business. For example, individual items may be shipped directly to consumers in the case of a wholesaler or distributor who engages in direct selling, or hundreds of items may be shipped from a wholesaler or a factory to retail locations where the items are sold.
Distribution costs are normally built in to the price of an item. For example, if 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 wholesaler pays the distribution cost, the wholesaler may charge the retailer more for the purchase of the item to pay for the cost of shipping. If the retailer pays the shipping cost, that cost is factored in when the item is priced for resale to the end user or consumer.
True distribution cost generally refers only to actual shipping fees. In other words, a distribution cost may be the cost of employing a truck driver to drive items to the end user. The cost may also refer to the cost of shipping the item via the mail or some other method.
In some cases, advertising and marketing costs are considered part of distribution cost, since advertising is necessary to secure individuals who want to purchase the item. In most cases, however, advertising costs are listed separately as marketing costs, and are calculated separately. The distribution costs are then a separate line item on a budget or profit/loss statement that tracks the purchase amount or sales cost of an item.