A commission expense is a type of operating expense that businesses incur when they pay their salespeople a commission from the sales they generate.
Commissions are typically calculated as a percentage of the sale price, and they can be paid on a monthly, quarterly, or annual basis.
Is sales commission a period cost? Yes, we classify commissions as a period cost.
A period cost is an expense that indirectly relates to a product’s development process. Meanwhile, a product cost directly relates to product development like the raw materials or resources to build the product and direct labor.
Other period costs include marketing budgets, utility fees, business travel, employee benefits, and incentive pay. Product costs are expenses that are necessary to physically build the product being sold, such as raw materials, manufacturing supplies, and direct labor.
The amount of commission expense that a business incurs will vary depending on the number of sales made, the average sale price, and the commission rate. For example, if a business has a commission rate of 10% and sells 100 units at $100 each, the commission expense will be $1,000.
Commission expenses can have a significant impact on a company’s profitability, and you also want to keep an eye on effective rates.
The effective rate is the percentage of a sale that goes to the salesperson after all costs and fees have been deducted. It is calculated by dividing the total commission paid to the salesperson by the total sales generated.
So, if a salesperson generates $10,000 in sales and receives a commission of $1,000, their effective rate would be 10%.
The effective rate is an important metric for businesses to track because it can help them to understand how much they are paying their salespeople and how much profit they are making on each sale.
There are a number of factors that can affect the effective rate, including the commission rate, the type of products or services being sold, and the sales process.
To improve your effective rate, lower commission rates, sell higher-margin products or services, and streamline your sales process.