Selling, general and administrative expense definition
/What is Selling, General and Administrative Expense?
Selling, general and administrative expense (SG&A) is comprised of all operating expenses of a business that are not included in the cost of goods sold. In effect, it includes all operating expenses not directly associated with the goods and services being sold to customers. Management should maintain tight control over these costs, since they increase the break even point of a business.
The following departments and their expenses are all considered to fall within the SG&A classification:
Accounting and legal expenses
Corporate expenses
Facility expenses
Sales and marketing expenses
SG&A expenses are mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. However, a few of these costs can be considered direct costs. For example, sales commissions directly relate to product sales, and yet may be considered part of SG&A. When an SG&A cost is considered a direct cost, it is acceptable to shift the cost into the cost of goods sold classification on the income statement.
Presentation of Selling, General and Administrative Expense
SG&A appears in the income statement, below the cost of goods sold. It may be broken out into a number of expense line items, or consolidated into a single line item (which is more common when the condensed income statement is presented). Investors and lenders may demand that this information be broken out into multiple line items for their perusal. This information can be quite useful for financial statement readers, who can plot expense amounts on a trend line, as well as a percentage of net sales, to ascertain how efficiently the business is being managed.
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What is Not Included in SG&A?
The SG&A classification never includes the cost of goods sold, and generally does not include the expenses incurred by the research and development department. In addition, it does not include financing costs, such as interest income and interest expense, since they are not considered to be operating costs.
How to Manage SG&A
From a management perspective, SG&A represents a large fixed cost that increases the break even point of a company, and therefore requires higher sales or higher product profits in order to turn a profit for the entire business. Consequently, it is especially important to maintain tight control over SG&A costs, which can be achieved through the continual review of discretionary costs, trend analysis, and comparisons of actual to budgeted costs. Zero-base budgeting can also be used to maintain control over the SG&A expense category. This is generally considered to be the easiest area in which a management team can cut costs, since the direct costs of producing goods and services are relatively immovable, as are financing costs.
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