The selling, general and administrative expense (also known as SG&A) is comprised of all operating expenses of a business that are not included in the cost of goods sold. Management should maintain tight control over these costs, since they increase the break even point of a business. 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).
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
The classification generally does not include the expenses incurred by the research and development department. In addition, it does not include financing costs, since those are not considered to be operating costs.
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.
From a management perspective, SG&A represents a large fixed cost that increases the breakeven 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 line analysis, and comparisons of actual to budgeted costs. Zero-base budgeting can also be used to maintain control over the SG&A expense category.