Updated July 19, 2023
Definition of SG & A Expenses
SG & A Expenses (Selling, General & administrative) does not include the costs directly associated with producing goods or performing services. Still, these are the expenses incurred by the company to manage Company’s regular operations or for delivering the goods and services to the customers, and all the selling expenses, either direct or indirect, and administrative expenses are shown in the Statement of Profit and Loss (Also known as Income Statement) of the company.
Explanation
SG & A Expenses (Selling, General & administrative) are incurred by the company to make the products or services available to the users or to manage the normal day-to-day operations of the company. These expenses are not product specific, hence not included in the calculations of the cost of sales. SG& A expenses are shown in the Income statement under the ‘expense’ head. When management implements a cost reduction strategy, it targets SG& A expenses as these are not directly associated with manufacturing goods.
Type of SG & A Expenses
The company incurred two types of selling expenses while selling a product. One is direct selling expense, and the other is indirect Selling expense.
- Direct selling expenses are product-specific costs incurred only at the time of sales of goods, like sales commission, shipping charges, delivery charges, etc.
- Indirect selling expenses are incurred throughout the production process and after the production process is over or the product is ready for sale. It includes the expenses related to the product advertisement, the salary of marketing personnel, traveling expenses, telephone bills, etc.
G& A expenses (also known as general overhead) are the expenses incurred by the company to manage its normal business operations. These expenses are not associated with specific products, functions, or company departments. Selling expenses may fluctuate but are fixed as they include Rent of office buildings, annual maintenance charges, staff salary (other than sales personnel), insurance charges, etc.
What’s Included in SG & A?
- SG & A includes all the costs unrelated to the production of goods or not covered by the COGS.
- It includes the salary of various departments like the IT, HR, Accounts, and Sales Department.
- It also includes expenses incurred to promote the sales of goods, like commission on sales, marketing expenses, etc.
- Some expenses are fixed or semi-fixed in nature but not associated with the production of goods and are also included in SG&;A expenses like rental expenses, insurance charges, etc,
- It does not include interest expense, as it is separately shown in the income statement. Also, Costs related to Research and developments are not covered in SG & A expenses.
Example of SG & A Expenses
Suppose Mr. Naman is an accountant of Zee Ltd who is required to calculate the SG & A expenses. For this, he has to include payroll expenses of various departments, rental expenses, insurance charges, repair and maintenance charges, marketing expenses, traveling expenses, telephone charges, advertisement expenses, and other general office expenses in the computation of SG& A expenses. This will result in total SG & A expenses in the company’s Income Statement.
Forecasting SG & A Expenses
The forecasting of SG & A Expenses (Selling, General &; administrative) can be done by either of the following methods:
- As a percentage of revenue from sales operations
- The growth rate is applied over the amount of the last period
- Fixed dollar value
Suppose SG & A expenses are consolidated and shown as one line item in the company’s income statement. In that case, the analyst can forecast these expenses by applying any method (out of three) of forecasting uniformly on all expenses under the head SG & A.
Sometimes it is shown as a heading in the income statement under which various expenses associated with SG & A are written in individual lines. A different forecasting method is followed for the different line items in this case. For example, Marketing expenses may vary from period to period based on strategic decisions taken by the management. For rental expenses, mostly the method of fixed dollar value is used.
Advantages of SG & A Expenses
- The costs associated with SG & A can be regularized easily or cut down without disturbing the production process to enhance the company’s profitability.
- These costs are very important for the business to keep going and help to compute the company’s profitability, as operating income is calculated by deducting SG & A expenses from the company’s Gross profit.
- This is the first place managers look at it during mergers or acquisitions. Here the manager easily reduces the SG & A by removing the number of employees in repeated positions and increasing the company’s earnings.
Disadvantages of SG & A Expenses
- The deduction of SG & A expenses from the company’s Gross profit will result in earnings before interest and taxes or the company’s operating profit. If a company incurs more SG & A in a period, it will reduce the profit of the company for that period.
- Excessive SG & A expenses results in less profit available to the company, which is required to distribute among the company’s shareholders as a dividend. In other words, it lowers the return of the shareholders.
Conclusion
Thus, it is used to calculate the company’s operating income. If SG & A are subtracted from the company’s gross profit, it results in its EBIT. More SG & A expenses mean less profit to the company and may lower the shareholders’ return. Still, these expenses are necessary for the business to keep running, So the management should keep the company’s structure in mind and spend the balance amount of SG & A expenses.
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