Definition of SG & A Expenses
SG & A Expenses (Selling, General & administrative) does not includes the costs directly associated with the production of goods or performance of services but these are the expenses incurred by the company to manage Company’s regular operations or for delivering the goods and services to the customers and all the selling expenses either direct or indirect and administrative expenses are shown in the Statement of Profit and Loss (Also known as Income Statement) of the company.
Explanation
SG & A Expenses (Selling, General & administrative) are incurred by the company to make the products or services available to the users or to manage the day to day normal operations of the company. These expenses are not product specific, hence not included in the calculations of the cost of sales. SG& A expenses are shown in the Income statement under the ‘expense’ head. When management works on the implementation of cost reduction strategy, it targets SG& A expenses as these are not directly associated with the manufacturing of goods.
Type of SG & A Expenses
Two types of selling expenses are incurred by the company while selling a product. One is direct selling expense and other one is indirect Selling expense.
- Direct selling expenses are product specific costs incurred only at the time of sales of goods like sales commission, shipping charges, delivery charges, etc.
- Indirect selling expenses are the expense incurred throughout the production process and after the production process is over or the product is ready for being sold. It includes the expenses related to advertisement of the product, the salary of marketing personnel, travelling expenses, telephone bills etc.
G& A expenses (also known as general overhead) are the expenses incurred by the company to manage its normal business operations. These expenses are not associated with specific product or functions or department of the company. Selling expenses may fluctuate but these expenses are fixed in nature as they include Rent of office buildings, annual maintenance charges, the salary of staff(other than sales personnel), insurance charges, etc.
What’s Included in SG & A?
- SG & A includes all the costs which are not related to the production of goods or which are not covered by the COGS.
- It includes the salary of various departments like IT department, HR Department, Accounts Department, sales Department, etc.
- It also includes expenses incurred to promote the sales of goods like commission on sales, marketing expenses, etc.
- Some expenses are fixed or semi-fixed in nature but not associated with the production of goods are also included in SG&;A expenses like rental expense, insurance charges, etc,
- It does not include interest expense as it is separately shown in the income statement. Also, Cost related to Research and developments are also not covered in SG & A expenses.
Example of SG & A Expenses
Let’s see an example of SG & A expenses.
Suppose, Mr. Naman is an accountant of Zee Ltd who is required to calculate the SG & A expenses. For this, he has to include payroll expenses of various departments, rental expenses, insurance charges, repair and maintenance charges, marketing expenses, travelling expenses, telephone charges, advertisement expenses and other general office expenses in the computation of SG& A expenses. This will results in total SG & A expenses shown in the Income Statement of the company.
Forecasting SG & A Expenses
The forecasting of SG & A Expenses (Selling, General &; administrative) can be done by either of the following methods:
- As a percentage of revenue from sales operations
- The growth rate is applied over the amount of last period
- Fixed dollar value
If SG & A expenses are consolidated and shown as one line item in the income statement of the company, the analyst can forecast these expenses by applying any method (out of three) of forecasting uniformly on all expenses under the head SG & A expenses.
Sometimes SG & A expenses are shown as heading in the income statement under which various expenses associated with SG & A are written in individual lines. In this case, a different method of forecasting is followed for the different line item. For example, Marketing expenses may vary from period to period on the basis of strategic decisions taken by the management. For rental expenses, mostly the method of fixed dollar value is used.
Advantages of SG & A Expenses
Advantages of SG & A Expenses are provided and discussed as below-
- The costs associated with SG & A can be regularized easily or can be cut down without disturbing the production process in order to enhance the profitability of the company.
- These costs are very important for the business to keep it going and help to compute the profitability of the company as operating income is calculated by deducting SG & A expenses from the Gross profit of the company.
- During the process of Merger or acquisitions, this is the first place where manager look at. Here the manager easily reduce the SG & A expenses by removing the number of employees in repeated positions and increases the earnings of the company.
Disadvantages of SG & A Expenses
Disadvantages of SG & A Expenses are provided and discussed as below-
- The deduction of SG & A expenses from the Gross profit of the company will results in earnings before interest and taxes or operating profit of the company. If a company incurred more SG & A expenses in a period, it will reduce the profit of the company for that period.
- Excessive SG & A expenses results in less profit available with the company which is required to distribute among the shareholders of the company as a dividend. In other words, it lowers down the return of the shareholders.
Conclusion
Thus, SG & A expenses (Selling, General and Administrative) are used to calculate the operating income of the company as if SG & A expenses are subtracted from the gross profit of the company it results in EBIT of the company. More SG & A expenses means less profit to the company and it may lower down the return of the shareholders but these expenses are necessary for the business to keep it running, So, the management should kept the structure of the company in mind and spent the balance amount of SG & A expenses.
Recommended Articles
This is a guide to SG & A Expenses. Here we also discuss the definition and type of SG & A expenses along with advantages and disadvantages. You may also have a look at the following articles to learn more –
