SG&A Meaning: Selling, General & Administrative Expenses Definition Bench Accounting

In addition, depreciation costs are often reported in this section of the income statement but excluded from SG&A as well. If it’s an expense necessary to produce your product or your service, it’s COGS.

In short, direct costs are directly related to the product being sold, while indirect costs are what you spend money on to earn sales. The way you list your SG&A and operating expenses on your income statement is completely up to you. A variable cost structure is one in which the SG&A costs keep pace with sales.

SG&A Expense (Quarterly) Benchmarks

Let’s discuss the main differences between the two types of expenses. Operating costs are expenses companies incur during normal operations. Operating expenses include all of the expenses that aren’t covered under cost of goods sold, such as rent, equipment, and marketing. sg&as are mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. For example, sales commissions directly relate to product sales, and yet may be considered part of SG&A. When an SG&A cost is considered a direct cost, it is acceptable to shift the cost into the cost of goods sold classification on the income statement. You might encounter a problem when you’re analyzing income statements from two firms in the same industry.

• Pharmaceutical and healthcare have some of the highest SG&A expenses as a percent of revenue, while energy typically has a much lower ratio.
• When these expenses are deducted from the gross margin, the result is operating profit.
• We need to choose an income statement to view the SG&A expenses.
• Lendio’s software can help you to track and categorize your expenses properly.
• Since SG&A expenses are the cost of doing business, plan your budget accordingly to continue to meet your business goals.
• SG&A appears in the income statement, below the cost of goods sold.

Because demand for sunglasses is seasonal, he had excess capacity on his plastic-molding machines. He would incur no additional selling costs because his salespeople could easily sell the comb line when calling on their sunglasses accounts. Freight, packing, and warehousing costs, for example, were much lower for the OEM market than for the other two markets. The reason, the controller learned, was that OEMs typically order in bulk. Packing and freight costs for the replacement market were much higher because orders placed by hardware stores and other retailers are usually smaller and more varied. The cost of selling to the OEM market was also lower because the company’s salespeople didn’t have to call on OEM accounts as frequently as on accounts in the other two markets.

When Are Taxes Due for Businesses?

SG&A costs are typically reduced after a company merger or acquisition makes it possible to reduce redundancies. Selling, general, and administrative expenses (SG&A) are included in the expenses section of a company’s income statement. Some businesses include it as a subcategory of operating expenses on their income statement.

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. This includes the cost to rent equipment or make one-time, non-material costs that do not meet capitalization requirements. SG&A expenses are not assigned to a specific product, and therefore are not included in the cost of goods sold .

Selling, General & Administrative Expense (SG&A) Explained

Managers typically target SG&A for cost reductions because they do not directly affect the product or service. Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals. Changes to your SG&A expenses should always tie back to specific business objectives. Since SG&A expenses are the cost of doing business, plan your budget accordingly to continue to meet your business goals. Lendio’s software can help you to track and categorize your expenses properly. Understanding where you’re spending money is the first step in making strategic decisions (e.g., should you spend more on social media advertising next month?).

Hearst Newspapers participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. While SG&A brings great benefits to a company’s recordkeeping, it also has limitations. Specifically, relying on SG&A figures can cause companies to aggressively cut costs. Some of these costs could be necessary, and cutting them may impact the company negatively. Common expense means the costs incurred by the association to exercise any of the powers provided for in this chapter. Likewise, the taxes paid to the government are also not included under the same rationale. We are not a law firm, or a substitute for an attorney or law firm.

To correctly track expenses and other important financial data, consider purchasing small business accounting software. It expedites and accelerates financial processes while ensuring accuracy and compliance. Some of the best business accounting software solutions also offer free accountant training programs to help you stay up to date on the latest functionalities and take advantage of the software. Especially as your company grows, tracking expenses can be a time intensive process and prone to error if done manually. Even small businesses and startups can benefit from accounting software that can unify your financial data, including expenses, sales and even payroll. For instance, energy and materials firms often run SG&A ratios of 10% or less, while industrial manufacturers often average 10%–20%. SG&A ratios of 25% are not uncommon for consumer product firms.