Selling, General and Administrative Expense(SG&A) is the term used in accounting to describe costs that associates with selling a product, brand or service as well as the overhead costs that are involved in running your company. You can locate the SG&A expense on the company’s accounting income statement. They are a method of ensuring that the cash flow is being properly managed and defined as period costs rather than product costs.
There are a wide variety of factors that contribute to the manufacturing process of a product including direct and indirect expenses, overhead costs and administrative expenses. SG&A expenses are a means of generating the net income for business. SG&A expenses are those daily costs that are not related to the direct product production. They include costs involved in promoting, selling and distributing a product, as well as any managerial tasks.
SG&A does not apply to the cost of goods sold and instead, it associates with the contributing factors that are involved in the manufacturing of a product. As well SG&A include expenses that require company overhead.
What exactly are SG&A expenses?
Here are some selling expenses examples:
- Advertising costs
- Cost of promotional materials and goods
- Corporate expenses such as sales commissions and salaries.
- Office supplies
- Computers and other office equipment
- Staff salaries
- Accounting and legal expenses
- Facilities expenses such as rent, repair costs & utilities
- Entertainment Expenses
- Travel Expenses
- Tax and Audit Expenses
However, SG&A expenses do not include interest as those are reported as “non-operating expenses” on the business accounting statement. As well it does not include any expenditure that incurs as a result of research and development as well as financing costs as these are not operating expenses.
How is SG&A broken down?
Selling expenses may be divided into two categories: direct and indirect costs and involved those expenses associated with the marketing and sale of a product, service or good.
Direct expenses are those costs that happen when selling the product.
- Delivery charges
- Shipping and handling supplies and costs
- Sales commissions
Indirect expenses are those costs that incur through the entire production process and after completion of the product or good. The item does not have to be sold to be a factor considered an indirect expense.
Indirect costs include the following:
- Advertising and marketing costs and materials
- Travel expenses
- Salaries of sales associates and personnel
General and Administrative Expenses
General and administrative expenses are those costs that are otherwise known as the overhead costs of business. Those are the costs that are involved with the general day to day operation of the company and include (but are not limited to) the following:
- Salaries of nonsales personnel
How do SG&A Expenses Affect Profitability?
If a company is experiencing low profitability, it can indicate that the business has issues such as overly high expenses, insufficient management and administrative teams or even a poorly manufactured product. Management’s goal is to look for ways to reduce their costs and increase profits without substantially affecting the production process.
One way to cut back on SG&A costs is to reduce or eliminate the salaries of nonessential personnel. However, you must take this decision under careful consideration of the management and administration teams as layoffs can reduce the overall company morale, which then can significantly affect production, thus reducing profitability.
You may also reduce your SG&A by increasing profitability during company mergers and business acquisitions. As two companies join forces of departments and staffing postings may become redundant. Again, management will need to make some tough decisions regarding staffing and other expenses that result from the merger or acquisition to see how they will directly affect SG&A costs.
How Does SG&A Apply to Manufacturing?
In the manufacturing industry, SG&A includes those costs that apply to those manufacturing overhead costs that include factors such as direct goods, materials and labor and other expenses directly related to product production and also involves the cost of factory equipment expenses such as initial cost, repairs and maintenance, and facility supplies. It also includes non-manufacturing costs such as rent, utilities, property management fees, property taxes, transportation and travel expenses, sales and marketing expenses, and so forth.
For those directly involved in administration and management, SG&A is a representation of the large fixed cost that includes the break-even point of the business and then leads to higher production and sales to increase profitability. Therefore it is crucial to maintain tight control over SG&A expenses, and you can achieve this through an ongoing and detailed review of trend-line analysis, comparison of budget versus actual costs and discretionary costs.