What are Selling Expenses?
Selling expenses are the costs which are incurred by the sales department of an organization for selling companies products or providing services; this is mainly related to distributing, marketing & selling. This cost is not directly related to the production or manufacturing of any product or delivery of any services. Hence, it is categorized as an indirect cost.
These expenses are generally listed before general & administrative expenses in the operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more section because creditors & investors are more interested in the cost, which is directly contributing to increasing sales. Hence they are given more priority as compared to general & administration expenses.
List of Selling Expenses Examples
- Logistics Expenses
- Insurance ExpensesInsurance ExpensesInsurance Expense, also called Insurance Premium, is the amount a Company pays to obtain an insurance contract for covering their risk from any unexpected catastrophe. You can calculate it as a fixed percentage of the sum insured & it is paid at a daily pre-specified period. read more
- Shipping Expenses
- Advertising Expenses
- Wages & Salaries of Sales Employees
- Selling Commissions
There are specific industries for which advertising is the backbone of their survival, as in the sustainability of that industry is dependent on their selling & marketing strategies, in that case, companies are required to spend heavily on selling expenses. For example, Pepsi & coca-cola have very tough competition; hence if one of them comes up with creative advertisement, the other company is also pushed to incur such expenses forcefully to keep up their market share.
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For eg:
Source: Selling Expenses (wallstreetmojo.com)
How to Calculate?
To calculate selling expenses, we simply have to add all sales-related expenses which are not directly related to the production process; it can be fixed or variable. Salary payables to sales staff come in fixed expenses; however, commissions payable is derived based on sales, so that can be considered as variable expenses.
Journal Entries of Selling Expenses
#1 – For Accrual Accounting
If we receive a bill and pay it immediately in that case debit an appropriate expense account and credit cash or bank account & if we have received a bill but haven’t paid it before the month-end in that case we have to debit an appropriate expense account and credit accounts payable and when an invoice is paid entry would account payables debit & cash or bank credit.
Sometimes it might happen that we don’t receive any bills for expenses, but we can estimate those expenses based on the previous months’ trend. In such cases, we have to accrue expenses based on the budgeted amount. Entry for accrual of such expenses debit the appropriate expenses and credit the accrual expensesAccrual ExpensesAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more account. When we receive a bill, we can post the reversal entry & reclass accrual expenses to accounts payable and once a bill is paid debit accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more & credit cash/bank account.
#2 – For Cash Accounting
Here we have to post journal entry only if we make the payment for bill & entry would be appropriate debit expenses & credit cash or bank account. Still, if we receive a bill and we don’t pay it before month end, then no entry is to be posted; hence by following cash accountingCash AccountingCash Accounting is an accounting methodology that registers revenues when they are received & expenditures when they are paid in the given period, thereby aiming at cash inflows & outflows. read more, we violate the matching principles.
In cash accounting, we don’t have to accrue any budgeted expenses since we debit only expenses for which payments are made.
Budgeting of Selling Expenses
The information related to selling expenses cannot be derived directly. Hence, managers use the general level of corporate activity to determine the appropriate budget. Commonly, the selling cost is derived by using incremental budgeting. This means the amount of budget is based on the most recent actual cost. This budget can be split up into segments based on different geographical areas.
How to Analyze these Expenses?
Management generally calculates the SAE ratio, i.e., sales to administrative expenses ratio. The higher SAE ratio is better for business & low ratio could reveal inefficiencies in the business.
The formula for calculating SAE ratio:
or
Economic Perspective
- Cost-Benefit Analysis – Those expenses which contribute to an increasing sale are considered beneficial expenses, so proper analyses of such selling expenses will help management to decide on where to spend more. Those benefits can sometimes be tangible or intangible, direct or indirect.
- Break-Even Analysis – It is also known as “cost-volume-profit analysisCost-volume-profit AnalysisCost Volume Profit Analysis (CVP) is a way to understand the relationship between cost & sales and profit. It determines the effect of change in cost and sales on the profit of the company.read more” it helps to know the operating condition of the company that means sales volume at which the organization is recovering all variable & fixed cost. While calculating the break-even pointBreak-even PointBreak-even analysis refers to the identifying of the point where the revenue of the company starts exceeding its total cost i.e., the point when the project or company under consideration will start generating the profits by the way of studying the relationship between the revenue of the company, its fixed cost, and the variable cost.read more, management has to consider both fixed & variable selling expenses. When the company is making losses, this point will help management to decide whether production should be stopped or can be continued.
Conclusion
Selling expense is one of the significant expenses in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more. It is one of the essential expenses, especially in the FMCG industry, where competition is very high. However, proper management of selling expenses can help an organization to increase its profitability. If they are showing an increasing trend, but sales are not growing, then it will show that the company is not operating efficiently. Or they are maybe struggling to sell their products or services. So they either need to invest money in distinguishing their products to increase the sale or need to improve the service quality.
However, when increased selling expenses helps increasing sale is a good sign, and that shows the organization is doing pretty well in the current market scenario.
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