Regardless of sales, a business needs to cover this mostly fixed overhead cost before it can begin to turn a profit, so understanding SG&A is important for management to understand. Other selling expense is indirectly related to the number of units sold. Rather, these are expenses incurred throughout the manufacturing process to earn more sales, such as base salaries of salespeople, marketing, and out-of-pocket travel expense. The two main categories of expenses on an income statement are the cost of goods sold (COGS) and selling, general, and administrative (SG&A) expenses. COGS is the expense that most directly drives revenue and refers to the direct costs of manufacturing goods sold. SG&A is one of the line items requiring detailed examination when comparing company cost structures and profitability.

• The second way to forecast SG&A Expense is by projecting it as a percentage of revenue.
• SG&A expense represents a company’s non-production costs in selling goods and running daily operations.
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• Likewise, the taxes paid to the government are also not included under the same rationale.

On the income statement, total revenue is shown and reduced by COGS to arrive at gross profit. This shows how much revenue remains to cover operating expenses and hopefully still leave a profit. Selling, general & administrative expenses (SG&A), also known as operating expenses, are the costs involved in daily business operations. Anything that is not directly related to product production and the cost of goods sold is usually considered a SG&A expense. Commonly referred to as indirect costs, operating or SG&A expenses can include the following.

What is an SG&A expense?

The only real difference between operating expenses and SG&A is how you record them on the income statement. Some businesses prefer to list SG&A as a subcategory of operating expenses on the income statement. Other companies may prefer to separate selling expenses from the G&A costs on the financial statement instead. They are incurred in the day-to-day operations of a business and may not be directly tied to any specific function or department within the company. They are usually fixed costs that are incurred disregarding the amount of sales or production incurred during a certain period.

• Accordingly, Sage does not provide advice per the information included.
• The SG&A expense is recorded on the income statement of companies in the section below the gross profit line item.
• G&A expenses are the overhead costs of a business, many of which are fixed or semi-fixed.
• COGS includes the expenses necessary to manufacture a product including the labor, materials, and overhead expenses.

SG&A is given as an expense line on the income statement and encompasses all direct and indirect selling costs incurred by the business. Some of the expenses included within SG&A include advertising, sales commissions, marketing, rent, utilities, management salaries, travel, meals, stationery, and more. In some cases, depending on the context, depreciation expense can also be included in SG&A.

Types of SG&A Expenses

Companies incur these expenses in order to keep their business running. Every company, no matter how efficient, will incur at least some sort of administrative expense. For example, general & administrative expenses include the salary and bonus to the company’s management team. It also includes the compensation to the company’s personnel in administrative functions, such as finance, legal, and human resources.

It allows them to determine which company can better generate operating income. Pricing strategy and labor costs affect operating margin and stakeholders can use the ratio to measure managerial flexibility and competency. Separately tracking SG&A expenses helps even small businesses get a better handle on operating costs. Your COGS are the direct costs related to making, packaging and shipping the soaps—raw materials, the wages you pay your soap maker Cheryl, the fancy packaging paper you use, shipping costs, etc. A variable cost structure is one in which the SG&A costs keep pace with sales.

SG&A Expenses vs. Operating Expenses

It captures the costs incurred to market and administer a company. Analysts can forecast SG&A with a growth rate, as a percentage of revenue, or through the sum of its components. The third way to forecast SG&A Expense is by projecting the components that make up SG&A and adding them up.

(SG&A)? How to Calculate & Examples

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Administrative Expense

This line item includes nearly all business costs not directly attributable to making a product or performing a service. SG&A includes the costs of managing the company and the expenses of delivering its products or services. SG&A expenses include all of the day-to-day operating costs of running a company that aren’t directly related to producing a product or service (i.e., non-production costs).

What are some typical SG&A expenses?

Think of an importer that has only a warehouse and almost no other fixed expenses. It has just a 15% commission that it pays to independent road salesmen. That protects the business and its shareholders in a down market. Company ABC’s total selling, general, and administrative expenses for the period is $8,600.

Whether you provide line-by-line detail on your income statement or do a single line item entry, you’ll need to properly categorize SG&A expenses. If you’re using accounting software, the structure of the software will automatically categorize SG&A expenses based on information provided during the software setup process. Selling expenses are those that are directly related to the sales process and include these types of expenses. Major business expenses include selling, General, and Administrative Expenses. These expenses have an important role in expanding the business. Many of these expenses are used to attract new customers or orchestrate business deals.

Think you could renegotiate your company’s internet and phone bill? Look through each of your business’ monthly expenses and make sure you aren’t overpaying for them. The SG&A to sales ratio (also sometimes called the percent-of-sales method) is what you get when you divide your total SG&A costs by your total sales revenue. It tells you what percent of every dollar your company earned gets sucked up by SG&A costs.

Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. The second way to forecast SG&A Expense is by projecting it as a percentage of revenue. In practice, many large corporations budget their SG&A expenditures based on how much revenue the company will generate. For example, let’s say a company will generate $5,000 of revenue next year. If the company spends 20% of revenue on SG&A, then that implies $1,000 of SG&A Expense next year. While it’s important to know a company’s historical SG&A Expense, it’s also helpful to forecast future SG&A Expense.

Selling expenses include both indirect and direct business costs. Companies may aggregate all of these expenses in a single SG&A line, or it may segregate selling costs from general and administrative costs. Once SG&A is deducted from gross profit – assuming there are no other operating expenses – operating income (EBIT) remains. Administrative expenses are usually centered on staff and consulting costs. In most cases, smaller businesses will have limited administrative costs. SG&A is usually reported on the Income Statement as an operating expense.

For example, research and development costs are often not to be included in SG&A. In addition, depreciation costs are often reported in this section of the income statement but excluded from SG&A as well. Operating expenses, or OPEX for short, are the costs involved in running the day-to-day the cost principle operations of a company; they typically make up the majority of a company’s expenses. SG&A can be broken down into selling expenses and general and administrative expenses. When conducting comparisons of similar companies, analysts will routinely calculate the operating margin.

Get our latest business advice delivered directly to your inbox. Our easy-to-use template will help you understand the cash coming in and going out of your business so you can make smarter decisions. If you’re trying to get a better handle on your business finances, Bench can help. This means that 26.65% of every dollar XYZ Inc. earns gets spent on SG&A expenses. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.