How to Calculate SGA: Selling, General & Administrative

Selling, General, and Administrative (SGA) expenses represent a significant category of costs for businesses, reflecting the expenditures necessary to operate the company beyond the direct costs of producing goods or services. Understanding how to calculate these expenses is fundamental for assessing a business’s operational efficiency and overall financial performance, providing insights into overhead and its impact on profitability.

Understanding Selling, General, and Administrative Expenses

SGA expenses include operating costs that are not directly involved in the manufacturing or acquisition of products for sale. These costs are categorized into selling expenses, which relate to marketing and distributing products, and general and administrative expenses, which cover the day-to-day running of the business.

Selling expenses include costs directly associated with the sale and distribution of products or services. Examples include advertising costs for promotional campaigns, salaries and commissions paid to sales personnel, and travel expenses incurred by sales teams visiting clients. Promotional materials, such as brochures or product samples, also fall under this category.

General and administrative expenses cover overhead costs for overall business operations. This category includes rent for office spaces, utility bills for administrative offices, and the cost of general office supplies. Salaries for administrative staff, such as human resources, accounting, and executive personnel, are also classified here. Professional fees for legal counsel or external auditors, business insurance premiums, and depreciation on administrative assets like office furniture and computers are also included.

These expenses differ from the Cost of Goods Sold (COGS), which are direct costs tied to the production of a good or service, such as raw materials and direct labor. SGA expenses are considered indirect costs because they would still be incurred even if production levels changed significantly.

Aggregating SGA Expenses

Calculating total SGA expenses involves summing all individual costs identified as selling, general, or administrative for a specific reporting period. Businesses track these expenditures in their general ledger or accounting software.

The calculation requires gathering all relevant expense accounts from the chosen period. For instance, if a company incurred $10,000 in advertising, $5,000 in sales salaries, $20,000 in office rent, and $15,000 in administrative salaries during a month, these amounts would simply be added together.

A conceptual formula for this calculation is: Total SGA = Sum of all Selling Expenses + Sum of all General Expenses + Sum of all Administrative Expenses. This periodic aggregation allows companies to monitor overhead trends and manage expenses effectively.

Presenting SGA on Financial Statements

The calculated total SGA expense is prominently displayed on a company’s income statement. This placement helps understand operational profitability after accounting for both production and non-production costs.

On the income statement, SGA expenses are listed below the Cost of Goods Sold (COGS), which yields the gross profit. After gross profit, SGA expenses are deducted to arrive at operating income. This structured presentation allows stakeholders to see the impact of administrative and sales efforts on overall profitability.