Where are selling and administrative expenses found on the income statement?

Selling, General, and Administrative (SG&A) expenses reflect the overhead costs a company incurs to promote, deliver and sell a company’s product or service, as well as expenses involved in managing the entire company. SG&A is given as an expense line on the income statement and encompasses all direct and indirect selling costs incurred by the business. Some of the expenses included within SG&A include advertising, sales commissions, marketing, rent, utilities, management salaries, travel, meals, stationery, and more. In some cases, depending on the context, depreciation expense can also be included in SG&A.

It is important to note that SG&A, unlike COGS,  is not directly related to the sales number. However, over a period of a whole year, these expenses are fairly flexible, so when a company forecasts, it can link the SG&A expenses to sales. SG&A expenses are generally not product-related costs, therefore companies don’t assign them to the cost of goods sold or to inventory as these costs are not attributable to the manufacturing process.

Key Learning Points

• Selling, General, and Administrative expenses are reported in a company’s income statement and represent any overheads included in a company’s core operating business related to supporting the business.
• The expenses are included in the calculation of operating profit, profit before tax, and net income.
• There are many types of expenses that are included in this line item including, advertising, marketing, rent, and other administrative-related expenses.
• SG&A is included in the calculation of operating margin, which measures how efficiently a company converts the revenue it generates into operating profit.

Why SG&A is Important

SG&A is critical when looking at a company’s profitability, conducting break-even analyses, and cost-cutting scenarios.

SG&A is one of the line items requiring detailed examination when comparing company cost structures and profitability. The break-even point for a company, which is where revenue earned equals the expenses incurred, can be adjusted most easily and efficiently by changing the SG&A cost component. Company management often targets the SG&A line when looking to boost profitability as reductions are less likely to affect product or manufacturing quality.

Presentation of SG&A on the Income Statement

Below is an outline for a simple income statement, broadly showing the progression from a sales number at the top to a net income figure at the bottom. In this instance, the expenses are shown as negative numbers.  However, this is not always the case.

Below is an extract from Expedia’s financial statements. In this case, Expedia has chosen to show the SG&A expenses in two separate line items –

• Selling and marketing
• General and administrative

Furthermore, both these line items have further details provided in the notes to the financial statements

SG&A in the Financial Statements

Operating Profit and SG&A

Gross profit minus SG&A costs results in the operating profit of the business. The operating profit shows the amount of money generated from sales minus the costs associated with making the product and supporting the business.

When conducting comparisons of similar companies, analysts will routinely calculate the operating margin.  It allows them to determine which company can better generate operating income. Pricing strategy and labor costs affect operating margin and stakeholders can use the ratio to measure managerial flexibility and competency.

The operating margin is a profitability ratio that measures how much profit a company makes per one dollar of sales. It is calculated by dividing the reported operating profit by the sales for that period.

Comparison

Below are extracts of the income statements for Coca-Cola and Pepsi from their three months end quarterly 10-Q reports for 2019.

SG&A reflects the non-production, everyday expenses of running a business, such as costs to promote, sell, and deliver its products and services, as well as rent, salaries and advertising and marketing. For many companies, managing SG&A is key to controlling costs and sustaining profitability. Business accounting software can help accurately and efficiently track your SG&A and other expenses and help you improve your company’s financial health.

The selling, general and administrative expense (SG&A) is comprised of all operating expenses of a business that are not included in the cost of goods sold. Management should maintain tight control over these costs, since they increase the break even point of a business. SG&A appears in the income statement, below the cost of goods sold. It may be broken out into a number of expense line items, or consolidated into a single line item (which is more common when the condensed income statement is presented).

The following departments and their expenses are all considered to fall within the SG&A classification:

• Accounting and legal expenses

• Corporate expenses

• Facility expenses

• Sales and marketing expenses

SG&A expenses are mostly comprised of costs that are considered part of general company overhead, since they cannot be traced to the sale of specific products. However, a few of these costs can be considered direct costs. 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.

What is Not Included in SG&A?

The SG&A classification never includes the cost of goods sold, and generally does not include the expenses incurred by the research and development department. In addition, it does not include financing costs, such as interest income and interest expense, since they are not considered to be operating costs. 

How to Manage SG&A

From a management perspective, SG&A represents a large fixed cost that increases the break even point of a company, and therefore requires higher sales or higher product profits in order to turn a profit for the entire business. Consequently, it is especially important to maintain tight control over SG&A costs, which can be achieved through the continual review of discretionary costs, trend analysis, and comparisons of actual to budgeted costs. Zero-base budgeting can also be used to maintain control over the SG&A expense category.

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