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.
What is Selling General and Administrative (SG&A) Expense?
SG&A expenses can be defined as all the operating expenses incurred by a firm which are not inclusive of the cost of goods sold. Like 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.
Types of Selling General and Administrative Expense
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 –
1. Selling expenses
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.
2. General and administrative expenses
These expenses are also known as a company’s overhead expenses. They make up the costs that a firm must incur to keep their 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 cost, financing cost, 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.
Significance of Selling General and Administrative Expense
Besides helping to understand a company’s profitability and computing its breakeven point, SG&A plays these significant roles –
- When firm owners intend to boost their operational profitability, they tend to begin with these expenses. The fact that operating expenses can be reduced easily and without disrupting the flow of the manufacturing and sales process works in favour of firm owners. In turn, business owners can identify the pattern of overspending and make necessary adjustments accordingly.
- SG&A expenses also happen to be among the factors to identify and lower redundancies in the event of acquisitions or mergers. For instance, several designations are often rendered redundant post-merger. In such a situation, company owners who intend to boost their profits in no time tend to scrutinise these expenses to gain a better idea about effective cost-cutting.
- AS discussed, these expenses also help to obtain the operating income of a firm. Usually, SG&A expenses are subtracted from gross margin to ascertain the operating income.
- They also come in handy for determining the EBIT of a company. In turn, it helps business owners and analysts to predict similar expenses for budgeting and profit forecasting.
Selling General and Administrative Expense versus Operating Expense
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’ subcategory in a firm’s income statement.
Lastly, the fact that selling general and administrative expenses are considered to be crucial for maintaining 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.