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Reason for applying 100% of sales credit to margins

What is the reasoning why a company would charge 100% of a sales credit directly to 100% of margings. An example if a product sells or $1000 and the margin is 50% meaning $500, why would a sales credit of $1000 be charged directly to margins meaning the hit on margins results in $-500. A sales rep paid on margins is penalized by $1,000 and not $500 and in the above example if 3 sales are credited then she's in the hole for $3000 instead of $1500. If however they are evaluated on sales then 100% is okay and fair. Can anyone please explain the logic behind this? I know there are COGS involved but I just cannot see the accounting principle for the person being evaluated and rewarded on margin. Thanks.

Answers

Anonymous
(CFO) |

You've lost me.

Is this a sales credit for a return or cancellation? Or, is this a partial credit as in a discount on the sale?

Anonymous
(Sr Account Manager) |

sales credit

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I'm lost.

A sale of merchandise has Revenue, COGS leading to Gross Margin. If you pay sales commissions, that would be included in COGS, but not in a commission calculation.

If you issue a credit for whatever reason, the Revenue amount is decreased. If you take back the merchandise and it can be resold, then COGS is decreased or in the alternative if you can obtain a credit (partial) from your supplier, then that amount ends up being the figure used to decrease COGS.

So, if Commission is paid on Revenue or Gross Revenue, a sales credit would effect both and the commissionable amount would be adjusted as well.

So what are you actually doing?

Jeremy Hair
Title: CFO
Company: House of Forgings, LLC
LinkedIn Profile
(CFO, House of Forgings, LLC) |

In your example, the margin was 50% and so when there is a credit without a return of goods, the company is out that $500 worth of product. The gross margin that a sales person would be paid on would be reduced by that same amount, which was exactly what they were paid on in the beginning.

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