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 that aren't directly attributable to making a product or performing a service. SG&A consists of the costs of managing a company and the expenses of delivering its products or services.

Key Takeaways

Selling, general, and administrative expenses (SG&A) are included in the expenses section of a company's income statement.
SG&A expenses are not assigned to a specific product so they aren't included in the cost of goods sold (COGS).
SG&A expenses are incurred in day-to-day business operations and may be required as part of operating any type of business.
Managers typically target SG&A for cost reductions because they don't directly affect the product or service.
SG&A expenses are closely related to operating expenses but some small technical differences exist.

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

SG&A plays a key role in a company's profitability and in calculating its break-even point or margin targets. It's also one of the first places managers look when they're reducing redundancies after mergers or acquisitions. This makes it an easy target for a management team that's looking to boost profits quickly. It's also the first place that private equity firms or strategic investors perform their due diligence when they're considering an investment or acquisition target.

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. These expenses are sometimes 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're 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're usually fixed costs incurred, disregarding the amount of sales or production incurred during a certain period.

Note

Many SG&A expenses are unavoidable. Companies are often required to carry insurance policies and to spend money to maintain their headquarters.

Types of SG&A Expenses

Selling Expenses

Selling expenses are often related to expenses that are 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 might choose to aggregate marketing costs with advertising costs although 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 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 have to be incurred regardless of the type of product or industry that a company operates within. These types of expenses include:

Rent: This is most often the cost of renting an office or headquarters space but it may encompass other items that are necessary for rent but aren't related to the manufacturing process.
Utilities: This relates to electricity, water, sewer, or garbage expenses that aren't part of the manufacturing process.
Office Equipment: This includes the cost to rent equipment or to make one-time, non-material purchases that don't meet capitalization requirements.
Supplies: This includes general office supplies that are 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 who provide services for a fee. They often don't 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.

Note

General and administrative costs are rarely reported separately. It's fairly common to see these two costs reported together.

How to Calculate SG&A Expenses

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

Assess whether expenses are directly related to the manufacturing of the product. Costs that aren't 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 aren't included in SG&A because they're deducted from operating income.
Determine your reporting period. SG&A can be calculated for any period such as for a month, a quarter, or a 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. 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. The result is operating profit when these expenses are deducted from the gross margin.

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 ways. Companies can aggregate all these expenses in a single SG&A line or they can segregate selling costs from general and administrative costs.

SG&A expenses as a percentage of revenue are generally high for healthcare and telecommunications businesses but relatively low for real estate and energy.

SG&A Expenses vs. Operating Expenses

SG&A expenses and operating expenses are the same in many cases. Both encompass expenses that are necessary to operate a business independent of the costs of manufacturing 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 because it's 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 and 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. Research and development costs are often not to be included in SG&A. Depreciation costs are often reported in this section of the income statement but are excluded from SG&A as well.

Examples of SG&A Expenses

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

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

Amazon also guides the notes to its financial statements to explain what makes up the sales and marketing categories in addition to the general and administrative categories.

What Is the Difference Between COGS and SG&A?

SG&A includes almost every business expense that isn't included in the cost of goods sold (COGS). COGS includes the expenses that are necessary to manufacture a product, including the labor, materials, and overhead expenses. SG&A costs are the residual expenses that are necessary to run the organization and incur costs less specifically tied to the cost of making the product.

What Are Selling Expenses?

Selling expenses include both indirect and direct business costs:

Indirect selling expenses include advertising and marketing costs, the company's telephone bills and travel costs, and the salaries of its sales personnel. Such expenses occur throughout the manufacturing process and even after the product is finished.
Direct selling expenses are incurred only when the product is sold and are related to the fulfillment of orders. They include the costs of shipping and shipping supplies, delivery charges, and the payment of sales commissions.

What Are General and Administrative (G&A) Expenses?

The G&A of SG&A can be called overhead expenses. A business has many expenses that are not directly related to making or selling a product. Office rent, utilities, and insurance are all costs of doing business. Departments like human resources and information technology support the company but don't take a direct role in product creation.

How Can SG&A Be Useful to a Business Manager?

SG&A is both critical to the success of a business and vulnerable to cost-cutting. Cutting the cost of goods sold (COGS) can be tough to do without damaging the quality of the product. Cutting operating expenses can be less damaging to the core business. SG&A costs are typically reduced after a company merger or acquisition which makes it possible to reduce redundancies.

Does SG&A Include Salaries?

It depends. The cost to directly manufacture products is included in COGS. This includes salaries such as manufacturing line supervisors. Other salaries, such as accounting staff, are included in SG&A.

The Bottom Line

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