Guide to SG and A Costs (With Examples and How to Calculate)
By Indeed Editorial Team
Published April 20, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Including a section on selling, general, and administrative expenses (SG and A) on an income statement can assist a business in cost optimization and overall profitability improvement. It entails a variety of expenditures that a firm calculates using a multistep method. Learning some fundamental information about this expense category, you can better determine a financial method that works for you. In this article, we define SG and A, explain why it's important to calculate these costs, discuss differences between these and operating expenses, share some examples, and outline the calculation process.
What is SG and A?
SG and A refers to the expenditures a business incurs as a result of overhead expenses, which include all daily operational duties and operations necessary for executives to create income. The selling components may include any expenditures associated with marketing or selling items to customers, such as marketing and distribution. For instance, you can classify administrative staff salary under these expenses because they perform critical functions for a corporation. The following are some of the most typical components of a company's selling, general, and administrative expenses:
Rent, utilities, and supplies
Software and technology costs
Human resources activities
Why is calculating SG and A important?
Calculating these expenses is critical because accountants often include these expenditures on a company's yearly income statement, which enables them to make effective comparisons of revenue and expenses. These are some of the reasons it's critical for an organization to determine these costs:
Finding the break-even point: Accountants can use the resultant income statement to determine a business's break-even point, which is defined as the point at which revenue equals costs. This sum can assist businesses in setting prices and developing a healthy budget.
Reducing overall costs: Compiling and analyzing a company's expenses can assist management in determining which expenditures they can decrease, allowing them to pursue profit-enhancing measures. For instance, a corporation may examine these expenditures and choose to rent a different office space that offers the same services, but at a cheaper monthly rate.
Creating efficient operations: Assessing a company's expenditures can assist executives in optimizing operational operations. For example, they may use this calculation to reduce the number of stages and materials necessary for a marketing campaign, lowering costs and increasing revenues.
Streamlining a merger process: When two businesses merge to establish a single taxable entity, executives frequently study personnel records to identify the most effective method to rearrange the hierarchy. By analyzing pay expenditures, they may improve their strategic planning and guarantee they retain critical personnel.
Differences between SG and A and operating expenses
While these and operating expenses (OPEX) both refer to non-production operational expenditures and may include identical components, businesses frequently distinguish these amounts when preparing an income statement. This strategy frequently enables executives to study specific parts in isolation, assisting them in identifying new revenue streams. Depending on the company's needs and general preferences during a particular accounting period, they might select which aspects to include in OPEX and other expenses sections. For instance, you may include the cost of legal representation in this section to separate it from routine expenses, such as salaries and utilities.
Examples of SG and A
Here are examples of specific items to include in this section:
Most companies hire marketing professionals to advertise products and services on varied mediums, which can help them engage potential customers. These endeavours often involve several events and require multiple materials so staff members can create effective campaigns. Including these costs on an expense report can help you better decide which items may be most valuable long term.
Rent and real estate costs
Companies often require building spaces to conduct day-to-day tasks. Administrative corporations often require office space, while retail and manufacturing companies may use a production facility or warehouse locations. Depending on a business's needs, executives can either lease these spaces or purchase their own buildings. As these costs are often prominent, it's often helpful to include them on a separate cost report.
Software and technology costs
Businesses often require certain hardware equipment and software programs to conduct daily operational activities. For instance, a retail company may purchase cash registers for store locations alongside an application program that allows staff members to sell items. Companies may also have technology needs for administrative tasks, like data entry and document preparation.
Human resources costs
A company's human resources (HR) department typically manages the hiring process and provides resources for employees. They may also remind staff members of essential tasks, like mandated training requirements and paperwork submissions, and help a company comply with any labour-related laws. If you include HR costs on a selling, general, and administrative expenses figure list, you can better optimize these processes and determine how much personnel the department requires.
If a business stocks valuable merchandise, it might invest some funds into a security system or specialized personnel. Executives can also hire a security company to activate these devices and monitor the company's facilities on a daily basis, which are services that may involve an additional fee. As a result, you may benefit from tracking these through a selling, general, and administrative expenses sum.
Businesses often purchase insurance policies to protect their employees, assets, and customers. Including these costs may help you better prioritize your list of expenditures, as it's often important to purchase a high-quality insurance policy. Here are some examples of insurance costs you may include:
Product liability insurance: Retail companies and similar businesses may purchase this type of insurance to ensure revenue if products have defects or they lose inventory items.
Professional liability insurance: Medical practices and similar companies often purchase this type of insurance, as it can protect a business during a lawsuit involving a professional's services.
Commercial property insurance: Many companies that own property purchase this type of insurance, as it can help executives protect all their assets during an emergency event.
How to calculate SG and A
You can follow these steps to calculate a company's selling, general, and administrative expenses:
1. Track the company's expenditures
To construct this section on an income statement, you can monitor and record all costs throughout the year. This method streamlines the procedure and improves accuracy. It may be beneficial to compile your data for the calculation using budgeting and spreadsheet applications because they can organize this information chronologically. Additionally, you may use these tools to store the figures in a convenient spot.
To prepare to track a company's selling, general, and administrative expenses, its executives and accountants may keep a monthly spreadsheet of all costs. They may use this spreadsheet and other information to generate a financial report that details each item and compares it to the previous month's results. Following that, they can properly and concisely name these files to enable future accessibility.
2. Identify each expense element
You may determine which cost elements to include in an operational expenses report versus a selling, general, and administrative expenses one. To perform this step efficiently, you might consult with an accounting department or use specialized software, such as a program that can analyze financial data. Then, you can review your financial records to learn whether a company's spending habits changed or whether executives encountered unexpected costs. Afterward, you can add each element and each current total expense to another chart.
Example: The retail company Danny's Scrumptious Pies wants to know its monthly costs, and its accounting team decides to consider all operational costs separately from day-to-day expenses, including sales-related travel costs, website maintenance expenses, legal fees, and facility repair rates. This strategy helps them identify which expenses to increase or decrease. Afterward, the accountants place each of the following figures on a new spreadsheet:
$2,000 for sales-related travel costs
$1,500 for website-maintenance expenses
$3,000 for legal fees
$1,000 for facility repair rates
3. Add these elements together
To calculate a company's selling, general, and administrative expenses, you may add all selling expenses to its general and administrative costs. You can calculate these expenses using this formula:
Selling, general, and administrative expenses = selling expenses + general and administrative expenses
Example: The retail company Danny's Pies wants to determine its total expenses. Its accountants add the sales-related travel and website maintenance costs together, as they consider these expenses to be selling components. Their sum totals $3,500. Then, they can add all the general and administrative expenses, which total $4,000. They use the formula to add these figured and find $7,500 in total annual SG and A expenses.
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