SG&A Expenses | List of Selling General & Administrative Costs

What are SG&A Expenses?

Selling, general and administrative (SG&A) expense includes all the expenses incurred in the selling of the products of the company whether direct or indirect along with the entire general and the administrative expenses during an accounting period under consideration such as advertisement expenses, sales promotion expenses, marketing salaries, etc.

SG&A Expenses are those expenses that are necessary to keep the business going, however, they are not directly included in the manufacturing cost or product cost.

SG&A Expense is included in the income statement of the company and examples include –

Rent
Utilities
Accounting and legal expenses
Sales commission paid
Salaries/wages

List of SG&A

#1 – Selling Expenses

Selling expenses are divided into direct expense and indirect expenses.

Direct expenses are shipping expenses of the product, sales commissions.
Indirect expenses are the costs that occur throughout the process of manufacturing which include product advertising and promotional expenses, traveling expenses, and telephone bills of the sales consultants.

#2 – General & Administrative Expenses

General & Administrative Expenses are the overhead expenses of the company. They are the fixed costs incurred by the company like the rent, mortgages, and insurances that need to be paid. It also includes all the salaries, wages of the workers.

SG&A expense depends on the structure of the company, whether the company has more fixed costs than variable costs and vice versa.

Scenario 1: If the company has more fixed costs than variable costs and if it has a high fixed cost then it needs to have high annual sales. If even there is a slightly dip in revenues then it won’t be able to cover its fixed costs. Such companies have a high break to generate profits.
Scenario 2: If the company has more variable costs and very low fixed costs will have more competition but they survive the phases of fall in revenue as they don’t have to think to bother about covering fixed costs.

Examples of SG&A Expense

Example #1

Now we will see an example of General & Administrative Expenses.

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Rajesh is an accountant of a startup company XYZ. He needs to calculate the Selling General & Administrative expenses which will also include the depreciation.

Rajesh needs to include the salaries of the people of all the departments of the company and also the associated taxes; utilities, telephone, insurance, rent , repairs & maintenance that are associated to the building and also the office equipment and also the advertising expenses, commissions, travel expenses, selling and marketing supplies, and administrative and general supplies.

Once he calculates the SG&A Expenses before depreciation, he deducts the depreciation of the office building, the depreciation of the office equipment. The net $ 238500 is the amount that will be reported on the income statement.

We will now see some live examples of Selling, General & Administrative expenses of some companies. We can get the data from the income statement of the company.

Example #2

SG&A Expenses of ITC is as follows:

We can get the report from the financial tab of ITC limited. We need to choose an income statement in order to view the SG&A expenses.

Source: Yahoo Finance

We can see that selling, general and administrative expense is reported in the operating expenses section of the income statement.

Importance

Selling, General & Administrative expenses are key in determining your operating income. If we subtract SG&A expense from Gross Margin, we get Operating Income.

It is a key element in determining the company’s profit.
These costs are essential in keeping the business going.
Sometimes in order to boost profitability, these costs need to be regularized.
During mergers and acquisitions, these costs are a key area to look at. A number of repeated positions can be cut down to bring down the SG&A costs and increase the operating income.

Disadvantages

Excessive SG&A Expenses will hurt the profit figures of the company and in return reduce the shareholder’s returns.

Important Points to Note

SG&A is an important point to remember when calculating the profitability of a company.
It is all the costs which are not related to the direct manufacturing of the product.
It is the sum total of the costs which are essential for the manufacturing process like the advertising costs, commissions, travel costs etc.
Research and development costs are not included in SG&A expenses.

The other important points to take note is regarding the situations where there are overspending and the ways it can be reduced.

Overspending

When such expenses increase too much without a rise in sales or a drop in sales, then it is very much important to reduce the SG&A costs.
High Selling, General & Administrative costs decrease the profitability of the shareholders

Ways to Reduce SG&A Expense

Restructuring and cost-cutting are required to reduce the expenses of Selling, General & Administrative costs.
Reduction of non-sales personnel salaries, cut in travel costs will help to regularize these costs.

Conclusion

Selling, General & Administrative expenses are a major driver of operating income. As we know, Gross Margin – SG&A = Operating Income, also referred to as EBIT (Earnings before interest taxes)

Therefore an excessive of SG&A expense leads to a decrease in EBIT. But these expenses are also important to carry on a day to day activities. Therefore a balanced amount should be spent keeping in mind the structure of the company (more fixed costs than variable costs and vice versa).