What Is Included in Selling, General & Admin Expenses?

Selling, General & Administrative (SG&A) expenses represent a significant category of non-production costs that a company incurs to operate its business. These expenses are distinct from the direct costs associated with manufacturing goods or providing services. Understanding SG&A is fundamental for assessing a company’s operational efficiency, as it reflects the costs necessary to support sales activities and overall business operations. This category of expenses provides insight into how effectively a company manages its overhead and sales efforts, contributing directly to its profitability. Analyzing SG&A helps stakeholders gauge management’s ability to control costs that are not directly tied to production volume.

Components of Selling Expenses

Selling expenses encompass all costs directly related to the marketing, selling, and distribution of a company’s products or services. These expenditures are incurred to generate revenue and reach customers. One primary component involves compensation for sales personnel, including base salaries, sales commissions, and performance bonuses.

Advertising and marketing costs also form a substantial part of selling expenses. This includes expenditures for television commercials, digital advertisements, print media campaigns, and promotional events designed to attract customers. Travel expenses for sales staff, such as airfare, lodging, and meals incurred while visiting clients or attending trade shows, are another direct selling cost. These expenses are necessary for sales teams to engage with potential buyers and maintain client relationships.

Furthermore, delivery expenses, which cover the costs of transporting finished goods from the company to the customer, fall under selling expenses. This can include freight charges, fuel for delivery vehicles, and salaries for delivery drivers. Sales-related office supplies, such as brochures, order forms, and product samples, are categorized here because they directly support the sales function.

Components of General and Administrative Expenses

General and administrative (G&A) expenses include the costs associated with the overall management and operation of a business, rather than direct sales or production. These are often overhead costs that support the entire organization. Executive and administrative salaries, for instance, are a primary G&A component, covering compensation for leadership, human resources, finance, and other support staff who do not directly produce goods or sell products. These salaries often include benefits like health insurance and retirement contributions.

Rent for corporate offices and utilities for administrative facilities are also significant G&A expenses. These costs provide the necessary infrastructure for administrative functions, such as billing, record-keeping, and strategic planning. Legal and accounting fees represent another common G&A expenditure, covering services like preparing financial statements, auditing, tax compliance, and legal counsel for corporate governance or contract negotiations.

Insurance premiums for general liability, property, and business interruption coverage are included in G&A, protecting the company from various risks. Depreciation of administrative assets, such as office furniture, computers, and administrative buildings, is also accounted for here, reflecting the systematic allocation of their cost over their useful lives. General office supplies, like paper, pens, and toner used by administrative departments, are considered G&A because they support daily operational tasks that are not directly tied to sales or manufacturing.

SG&A on the Income Statement

SG&A expenses hold a specific and important position on a company’s income statement. After a company presents its total revenue, it typically subtracts the Cost of Goods Sold (COGS) to arrive at its Gross Profit.

Following the calculation of Gross Profit, the SG&A expenses are then presented as a single line item or as a subtotal of various operating expenses. These expenses are subtracted from the Gross Profit to determine the company’s Operating Income, also known as Earnings Before Interest and Taxes (EBIT). This sequential presentation is important because it clearly separates the profitability derived from core production activities (Gross Profit) from the profitability that accounts for general business overhead and sales efforts.

The placement of SG&A below COGS highlights its nature as an indirect cost, essential for business operations but not directly tied to the creation of individual products. Analyzing Operating Income allows investors and analysts to assess a company’s profitability from its primary business activities, before considering financial costs like interest payments or income taxes.

Distinguishing SG&A from Other Costs

Distinguishing SG&A from other cost categories, particularly the Cost of Goods Sold (COGS), is important for accurate financial reporting and analysis. COGS represents the direct costs directly attributable to the production of the goods sold by a company or the direct costs of services rendered. These include expenses that vary directly with the volume of production, such as the cost of raw materials used in manufacturing a product or the wages paid to factory workers who assemble those products.

In contrast, SG&A expenses are indirect costs that are not directly tied to the creation of a product or service. They are generally considered period costs, meaning they are expensed in the period they are incurred, regardless of whether a product is sold. For example, the cost of steel and rubber used to build a car is part of COGS, as is the labor of the assembly line worker. However, the salary of the marketing director who designs the car’s advertising campaign or the rent for the corporate headquarters are SG&A expenses.

The conceptual difference lies in their relationship to the production process: COGS are manufacturing or service delivery costs, while SG&A are non-manufacturing operating costs. This distinction is important for calculating gross profit and operating income, which are key indicators of a company’s financial performance. Proper classification ensures that financial statements accurately reflect a company’s profitability from its core operations versus its overhead and sales support activities.