Movie Case Study:
The scene shows Rudra (played by Sanjay Dutt) confessing to a crime he committed. The police inspector (played by Manoj Joshi) in return decides to ask for commission & ignore his crime. The police station has an entire list that focuses on different items (such as gold, silver, TV, bike, etc.) being stolen and the commission percentage charged on those.
Learning Perspectives will explore how to calculate commission in different scenarios.
What is Commission?
The commission is a charge that is taken by the middleman in a transaction. It can also be referred to as part payment. This can be in terms of a flat rate or a percentage. Commissions are generally charged by brokers, consultants, and financial advisors.
The word commission is used differently in different places. In accountancy, a commission is recorded in the income statement. For a business, a commission is a fee (commission expense) that is paid to a salesman for getting more business.
For human resources, the commission can be classified as an incentive for the employees.
How is Commission Calculated?
The commission rate is the basic percentage rate that is charged. Similar to the scene that you saw, this could be 6%, 10%, etc. In a company, a salesman can be given a commission for each sale that he/she makes. Let us say an employee sells a fridge for Rs. 10,000. Now he is entitled to a commission of 15%.
This would be calculated as follows: 15/100*10,000 = 1,500
So in this assumption, the salesman just made one sale of Rs. 10,000 and received Rs. 1,500. This is one of the most straightforward ways of calculating commission. Sales amount*commission rate.
Incentives are offered to employees that are commission based. This can look something along the lines of salary plus commission. In this case, the salary is fixed while the commission is based on the criteria company deems fit.
Total Income = Salary + Commission
Commission = Sales amount*commission rate
To motivate employees, a graduated commission formula is adopted. This means setting up tiers as the employee’s sales volume goes up. An example to understand this would be: for the first Rs. 20,000 sales, an employee would receive a 10% commission, next Rs. 30,000 sales, they will receive 15%, and so on. This incentive is generally seen in the real estate, automobile & insurance sectors.