Definition of Selling Expenses
Selling expenses can be defined as the indirect expenses that appear in the income statement or profit and loss account of the company which is incurred for selling, distribution, and marketing of the product or service rendered by the company and are not directly or specifically incurred for the production of the goods or rendering of the services by the company.
The company’s selling expenses are categorized under the indirect head expenses and appear below the gross profit along with the other indirect expenses of the company. It is used to calculate the total cost of the product or service of the company, and also, from this total cost, earnings before interest and taxes can be calculated. It is incurred for distribution, marketing, and selling purposes. These all expenses are incurred to boost up and smoothen the company’s sales activities.
As explained above, these are not the direct expenses directly related to the production of the goods or services. Hence, they are not included in calculating the company’s gross profit. However, in terms of presentation, it is presented below the head Operating expenses in the company’s income statement.
Example of Selling Expenses
Let’s consider the company ABC ltd. Its income statement shows the following details;
|Cost of goods sold|
|Depreciation & Amortization||$300,000||$1,200,000|
Hence, selling expenses of $500,000 are shown under the head operating expenses and deducted from the gross margin to arrive at the operating income.
What Comes Under Selling Expenses?
The following is the list of expenses that come under it:
- Freight charges paid by the company: The charges paid by the company in the form of freight for delivering the goods to the customer are considered the selling expenses.
- Sales commission: Many companies pay the commission to different sales agents to boost sales in a particular area. As sales commission is directly related to the company’s selling activities, it is considered the sales expenses.
- The charges relating to the delivery vehicle: All the charges, including the fuel and other vehicle expenses through which delivery of the goods to the customer place, form part of the selling expenses.
- Repair and maintenance charges: These repairs and maintenance charges are related to the delivery vehicle used for delivering goods to the customer and thus form part of the selling expense.
- Depreciation of the delivery vehicle: There is wear and tear due to the delivery of goods to the customer; hence, these expenses also come under selling expenses.
- Insurance cost of the delivery vehicle: Every delivery vehicle is always prone to any unforeseen future accident during the transit of goods to customers; hence, it has to be insured, so the insurance charges of the delivery vehicle come under selling expenses.
- Insurance cost of goods in transit to the customer: Insurance expenses paid in connection with the goods to protect them from loss or theft form part of the selling expenses.
- Rent and rates charges for the warehouse: Goods are to be placed in the warehouse until it reaches the customer’s place. Hence, all the rent and rates charges paid form part of the selling activity and are included in the company’s selling expenses.
- Light and power charges of the warehouse: These charges are paid in the form of maintenance charges of the warehouse in which goods are placed toll they reach the customer’s place.
- Insurance of the warehouse: The insurance charges of the warehouse form part of the selling expenses because goods to be sold are first placed in the warehouse, and insurance charges are paid to protect them from any unforeseen loss in the future that can make them happy to goods placed in a warehouse.
- Discounts allowed to the customers: These include cash discounts and other forms like samples distributed as a product promotion by the company.
- Bad debts incurred by the company: Often, debtors, fail to pay the entire sales amount, thus defaulting their payment. Hence it affects the sale revenue and is therefore considered as the selling expenses.
- Promotion expenses to boost the sales: These expenses include advertisement expenses in hoardings or any other form and the free samples distributed as the promotion.
Why are Selling Expenses Important?
It is important due to the following reasons:
- Analysis of cost-benefit: It is considered a worthwhile expense because they contribute to increasing the company’s sales. These expenses can be direct, indirect, tangible, or intangible; hence, they help the management of the company in the decision regarding optimum utilization of funds, i.e., where they can invest their money to earn more profits.
- Analysis of the Break-even: It helps the company calculate its sales volume to determine whether it is recovering all its variable and fixed expenses, i.e., whether the company is above the breakeven point. This is also known as Cost-Volume-Profit analysis. Here, both the fixed and variable selling charges are taken into consideration by the management. If the company is making losses, this is the point where management can decide whether it should continue the production or not.
It is one of the most important parts of the income statement, especially in the FMCG sector. In such industries, where there is very high competition, the management can properly manage its selling expenses to increase profitability. Moreover, the selling expense calculation helps the company decide at which point it can stop production or vice versa increase production.
This is a guide to Selling Expenses. Here we also discuss the definition and What Comes Under Selling Expenses, along with an example and importance. You may also have a look at the following articles to learn more –