SG&A does not include the direct costs of producing goods or acquiring goods for sale, which are calculated separately as cost of goods sold . The amount that a company spends on SG&A may play a key role in determining its profitability. Selling, general, and administrative expenses also consist of a company’s operating expenses that are not included in the direct costs of production or cost of goods sold. While this is typically synonymous with operating expenses, many times companies list SG&A as a separate line item on the income statement below cost of goods sold, under expenses. This line item includes nearly all business costs not directly attributable to making a product or performing a service. SG&A includes the costs of managing the company and the expenses of delivering its products or services.
- SG&A costs include any expenses related to the operation of the company but not directly linked to producing and delivering its products.
- Corporate controllers must decide how far to go in breaking down SG&A expenses.
- General and administrative costs are rarely reported separately; it’s fairly common to see these two costs reported together.
- These expenses can also be referred to as overhead and include rent, utilities, insurance, salaries such as accounting and human resources, technology, and supplies other than those used in manufacturing.
- Some businesses include it as a subcategory of operating expenses on their income statement.
- But many business leaders gloss over the actual profit and loss statement.
After a merger, for example, businesses often focus on reducing SG&A by consolidating duplicative functions and reducing headcount. Some firms also manage SG&A by outsourcing functions or relying more on temporary workers. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Investopedia does not include all offers available in the marketplace.
Examples of Company Expenses
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Anything that is not directly related to product production and the cost of goods sold is usually considered a SG&A expense. Commonly referred to as indirect costs, operating or SG&A expenses can include the following. SG&A expense represents a company’s non-production costs in selling goods and running daily operations. Properly managing and understanding SG&A is crucial to control costs and sustain long-term profitability.
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It was later revealed that ABC had artificially padded its earnings by selling the original Jackson Pollack and Willem de Kooning paintings it owned. The sales kept the figures up so the company could avoid cutting spending. The SG&A to sales ratio (also sometimes called the percent-of-sales method) is what you get when you divide your total SG&A costs by your total sales revenue. It tells you what percent of every dollar your company earned gets sucked up by SG&A costs. Gross profit is a key profitability figure for a small business.
How to calculate selling, general, and administrative expenses (SG&A)
Other corporate services that couldn’t easily be charged to each product line could be allocated by simply dividing those costs by the number of product lines. Each line would absorb an equal amount of the costs on the assumption that these services were equally available to all divisions at any time. When a company’s raw materials costs vary greatly among its product lines, severe distortions in SG&A costs can result if accountants use conventional percent-of-sales or cost-of-sales methods of allocation. Other costs classified as SG&A expenses include travel, entertainment and advertising expenses. Bad debt — the amount of accounts receivable estimated as uncollectible — is an SG&A expense, as well as professional fees such as those paid for legal and audit services. Certain companies will file their financial statements with one line for SG&A, while others – for example, software companies – will separately break out G&A and sales & marketing.