How to Calculate Selling, General & Administrative Expenses

Selling, General, and Administrative (SG&A) expenses are costs a company incurs that are not directly tied to the production of goods or services. These non-production operational costs are essential for day-to-day operations. Understanding and accurately calculating SG&A is important for assessing a company’s financial health, operational efficiency, and profitability.

Understanding Selling, General, and Administrative Expenses

SG&A includes all non-production expenses incurred by a company over a specific period. Unlike the Cost of Goods Sold (COGS), which directly relates to manufacturing or acquiring products, SG&A costs are indirect and support broader business functions. This distinction allows businesses to evaluate their operating leverage and how changes in sales volume affect their profitability.

These expenses categorize into “selling expenses” and “general and administrative expenses.” Selling expenses relate to marketing, selling, and delivering products or services. General and administrative expenses, often called overhead, cover costs of managing overall business operations not directly linked to sales or production. Most SG&A expenses are largely fixed costs, incurred regardless of sales volume, though some can be variable or semi-variable.

Identifying Specific SG&A Components

Identifying specific SG&A components is a crucial step. Selling expenses include costs associated with sales and marketing efforts, such as advertising campaigns across various media, sales commissions, and promotional costs for events or product launches. Distribution and logistics expenses, including shipping, warehousing, and handling costs for delivering products to customers, are also part of selling expenses.

General and administrative expenses cover a wide range of operational overheads. This includes salaries and wages for executive, administrative, and non-sales personnel, along with related payroll taxes and benefits. Common general expenses are rent for office spaces, utilities like electricity and internet, and office supplies. Professional fees for services like legal counsel, accounting, auditing, and human resources also fall under this category.

Other administrative costs include insurance premiums for general business coverage, maintenance and repair costs for office equipment, and technology expenses. Depreciation expense on office equipment or buildings not directly used in production may also be classified under SG&A, depending on a company’s specific accounting policies. These detailed expense types must be tracked to accurately compile the total SG&A.

Accessing Necessary Financial Information

To calculate SG&A, businesses must access specific financial records that detail all incurred expenses. The primary source for this information is the company’s income statement, also known as the profit and loss (P&L) statement. On the income statement, SG&A is typically presented as a single line item below gross profit or Cost of Goods Sold (COGS).

While the income statement provides an aggregate SG&A figure, a more detailed breakdown is necessary for a precise calculation. This information is usually found in the company’s general ledger or detailed expense reports. These internal records contain individual expense accounts, allowing for the identification and summation of each specific SG&A component. For instance, separate accounts might exist for advertising, sales salaries, office rent, and legal fees.

Companies often provide footnotes in their financial statements that explain the composition of different expense categories, including SG&A. Reviewing these notes can offer further clarity on what specific costs are included in the reported SG&A amount. For internal management, referring directly to detailed ledgers ensures all relevant expenses are captured.

Performing the SG&A Calculation

Once all specific SG&A components have been identified and their corresponding financial data accessed, calculating total SG&A is a straightforward aggregation. This involves summing all individual selling expenses and all individual general and administrative expenses for a given period. The period can be a month, quarter, or an entire fiscal year, depending on reporting needs.

The calculation follows a simple formula: Total SG&A = Sum of all Selling Expenses + Sum of all General and Administrative Expenses. For example, if a company’s selling expenses for a quarter total $150,000 and its general and administrative expenses total $200,000, the total SG&A for that quarter would be $350,000.

Businesses use this total SG&A figure to assess operational efficiency and make informed financial decisions. It helps in understanding the overhead costs and how they impact profitability. The calculated SG&A is then reported on the income statement, contributing to the determination of operating profit.