SG&A: Selling, General, and Administrative Expenses

What Are Selling, General, and Administrative Expenses (SG&A)?

Selling, general, and administrative expenses (SG&A) include all non-production expenses for a reporting period. Examples of these expenses are marketing, advertising, rent, and utilities.

This line item includes nearly all business costs not directly attributable to making a product or performing a service. In a nutshell, SG&A consists of the costs of managing a company and the expenses of delivering its products or services.

Understanding Selling, General, and Administrative Expenses (SG&A)

SG&A plays a key role in a company's profitability and calculating its break-even point. SG&A is also one of the first places managers look to when reducing redundancies after mergers or acquisitions. That makes it an easy target for a management team looking to boost profits quickly.

Selling expenses can be broken down into direct and indirect costs. Direct selling expenses are incurred only when the product is sold. Indirect selling expenses occur throughout the manufacturing process and after the product is finished. Sometimes, these expenses are confused with the action of indirect selling, which happens when third parties or affiliates sell the products.

G&A expenses are the company's overhead. They are incurred in the day-to-day operations of a business and may not be directly tied to any specific function or department within the company. They are usually fixed costs incurred, disregarding the amount of sales or production incurred during a certain period.

Types of SG&A Expenses

Selling Expenses

Selling expenses are often related to the expenses necessary for a company to directly interface with customers. These types of expenses include:

• Sales Expenses: This often includes salaries and wages of salespeople, including commissions, payroll taxes, and benefits.
• Marketing: This may encompass expenses directly related to a company's product line, services, brand, or image. A company may choose to aggregate marketing costs with advertising costs, though some companies may have enough reason to segregate these costs.
• Advertising: This can be any form, and a company can choose to further refine the way it accounts for advertising by using many different general ledger codes.
• Travel Expenses: This is often related to in-person events or trade obligations such as trade shows or client meetings.

General Expenses

General expenses are often necessary to run a business. These costs would likely need to be incurred regardless of the type of product or industry a company operates within. These types of expenses include:

• Rent: This is most often the cost of renting an office or headquarters space but may encompass other items necessary for rent not related to the manufacturing process.
• Utilities: This relates to electricity, water, sewer, or garbage expenses not part of the manufacturing process.
• Office Equipment: This includes the cost to rent equipment or make one-time, non-material costs that do not meet capitalization requirements.
• Supplies: This includes general office supplies necessary for administrative personnel to carry out their jobs.
• Insurance: This is the broad coverage necessary for operating the business.

Administrative Expenses

Administrative expenses are primarily related to the cost of personnel. These employees may be internal staff or external parties providing services for a fee. These people often do not directly interface with the manufacturing or sale of goods. These types of expenses include:

• Accounting Payroll
• Information Technology/IT Payroll
• Human Resources Payroll
• Legal Counsel: These may be in-house salaries or paid to external firms.
• Consulting Fees: These are often paid to external parties for administrative purposes.
  

How to Calculate SG&A Expenses

Calculating SG&A expenses is straightforward once expenses have been classified into different categories. Several items to keep in mind when calculating SG&A costs include:

• Assess whether expenses are directly related to the manufacturing of the product. Costs not included in the production of goods must be included in the SG&A calculation.
• Be cognizant of "below the line" expenses. Costs such as interest and taxes are not included in SG&A as they are deducted from operating income.
• Determine your reporting period. SG&A can be calculated for any period (i.e., any month, quarter, or year). Be mindful that nominal accounts, such as expenses, are closed at the end of the accounting year. This information is often readily available in historical financial reports.
• Consider your accounting method. Cash basis accounting will only recognize SG&A costs that have been paid for. Meanwhile, accrual basis accounting will recognize broader expenses that may have been incurred but not yet paid.

How to Report SG&A Expenses

SG&A has a very specific place on a company's income statement. Net revenue is always reported at the top, then COGS is deducted to arrive at the gross margin. SG&A and any other expenses are listed below the gross margin.

When these expenses are deducted from the gross margin, the result is operating profit. It's important to note that not all expenses have been recorded when calculating operating expenses. Some expenses, such as interest or tax expenses, are reported below operating income.

A company may report SG&A in several different ways. Companies may aggregate all these expenses in a single SG&A line or segregate selling costs from general and administrative costs.

SG&A Expenses vs. Operating Expenses

In many instances, SG&A expenses and operating expenses are one and the same. Both encompass the expenses necessary to operate a business independent of the costs to manufacture goods.

There are several subtle differences between SG&A expenses and operating expenses. Larger companies often separate these types of costs into smaller, specific SG&A categories as this is often easier for companies to track and monitor costs in these groups. Management often has discretion in how many of these costs are reported on the income statement concerning how to group these types of costs.

There are also a few specific accounts that may warrant specific accounting treatment that excludes them from SG&A. For example, research and development costs are often not to be included in SG&A. In addition, depreciation costs are often reported in this section of the income statement but excluded from SG&A as well.

Examples of SG&A Expenses

As part of its Q1 2024 financial reporting, Apple reported $14.48 billion in operating expenses for the quarter. Of this, $7.70 billion was research and development, while $6.79 billion was selling, general, and administrative.

A more in-depth example is provided by Amazon. For the year ending Dec. 31, 2022, Amazon reported $22 billion in sales and marketing expenses in addition to $6.67 billion in general and administrative expenses.

Amazon also provides guidance via the notes to its financial statements to explain what comprises the sales and marketing category in addition to the general and administrative category.

The Bottom Line

A company must incur many different types of costs to run a business, and many of those expenses are not directly tied to making specific products. These broad costs are classified as selling, general, and administrative costs. Reported separately from COGS, these expenses are deducted from gross margin to determine a company's net income.