SG&A expenses or selling general and administrative expenses make up a crucial line of items on a firm’s income statement. They represent the daily expenses incurred by a company in activities other than sales or production. In fact, SG&A happens to be a key component of managerial accounting and helps in a firm’s management in more ways than one.
SG&A expenses can be defined as all the operating expenses incurred by a firm that is not inclusive of the cost of goods sold. As discussed, this expense is not assigned to manufacturing costs. It is because it deals with all the vital factors responsible for production.
It must be noted that such expenses can be divided into several categories or may be represented in a single line in case of a condensed income statement. Generally, salaries, rent, utilities, commissions, advertising and promotions, supplies, etc. which are not included in manufacturing are suitable for selling general and administrative expense examples.
Notably, potent cost-reduction strategies are formulated and targeted at SG&A to control and supervise it. It is done because these costs tend to increase the breakeven point of a venture and are monitored to optimise proficiency. Also, the fact any drastic reduction in these expenses does not affect the manufacturing or production process directly makes it a feasible option.
Typically, expenses under this category can be simply grouped as accounting and legal expenses, corporate expenses, sales and marketing expenses, etc. However, in a broader sense, SG&A expenses are of two types –
Such expenses can further be divided into direct and indirect costs which are related to the sale of a product. Typically, direct selling expenses are incurred by a firm during the sale of products and may include charges pertaining to shipping, delivery, sales commissions, etc. Such costs are directly related to products sold.
On the other hand, indirect selling expenses tend to occur throughout the manufacturing process and even after the products are manufactured. Typically, these expenses comprise marketing, product advertising, telephone bills, cost of travel, etc.
These expenses are also known as a company’s overhead expenses. They make up the costs that a firm must incur to keep its everyday operations running. It must be noted that general and administrative expenses may not be linked to any particular department or function of a firm. Usually, they comprise a mortgage, insurance, utilities, salaries of personnel, etc. Such expenses also include non-cash expenses like depreciation and amortisation.
However, to be clear about the concept of selling general and administrative expenses, one must also be aware of the items which are not included in these expenses. For instance, research and development costs, financing costs, interest income, and interest expenses are not a part of SG&A.
By referring to the information provided in the income statement of a firm, one can easily compute the SG&A expenses. A simple addition of – non-COGS, interest amount, or income tax expenses will provide a fair idea about the total expenses under this header. It must be noted that often some non-operating costs may also find their way under the SG&A header.
Also, at any time, an increase in SG&A expenses leads to a sharp decline in the company’s EBIT. Such information will help individuals to gauge the performance of the company’s operations more effectively.
Besides helping to understand a company’s profitability and computing its breakeven point, SG&A plays these significant roles –
It must be noted that both selling general and administrative expenses and operating expenses of a company indicate the same cost. Regardless, SG&A expenses are more likely to be listed as operating expenses’ subcategories in a firm’s income statement.
Lastly, the fact that selling general and administrative expenses are considered to be crucial for maintaining the everyday activities of a company makes it a vital component for managerial accounting. Consequently, the management must be careful when it comes to controlling the sources of these expenses.