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

Selling, General, and Administrative (SG&A) expenses are a category of costs that a business incurs as part of its regular operations, apart from the direct costs of producing goods or services (cost of goods sold). SG&A expenses are reported on a company’s profit and loss statement (income statement) and include costs related to marketing, sales, office operations, and executive management. Unlike production costs, SG&A expenses do not include financing costs or income taxes.

Examples

Salespersons’ Salaries and Commissions: These are the compensation costs for the company’s sales staff, including base salaries and commission payments for achieving sales targets.
Advertising and Promotion: These expenses cover various marketing activities, such as online or offline advertising, promotional events, and public relations campaigns.
Travel and Entertainment: Costs related to business travel for meetings, conferences, or client visits, as well as expenses for entertaining clients.
Office Payroll and Expenses: This category includes salaries for office staff, utilities, rent, office supplies, and other overhead costs required to maintain office operations.
Executives’ Salaries: Compensation for senior management and executive-level employees.

Frequently Asked Questions (FAQs)

1. What is included in SG&A expenses?

SG&A expenses include sales, general, and administrative costs such as salespersons’ salaries, advertising and promotion costs, travel and entertainment, office payroll and expenses, and executives’ salaries.

2. How are SG&A expenses reported?

SG&A expenses are reported on a company’s profit and loss statement, between cost of goods sold and income deductions.

3. Why are SG&A expenses important?

SG&A expenses are crucial for running the day-to-day operations of a business and can provide insight into the company’s cost management and operational efficiency.

4. Are financing costs included in SG&A?

No, financing costs such as interest expenses are not included in SG&A expenses.

5. How can companies reduce SG&A expenses?

Companies can reduce SG&A expenses through cost-cutting measures, such as optimizing staff levels, reducing travel costs through virtual meetings, and negotiating better terms with suppliers for office supplies.

Cost of Goods Sold (COGS): The direct costs attributable to the production of the goods sold by a company. This includes the cost of materials and labor directly used to create the product.
Operating Expenses: Expenses incurred during normal business operations, encompassing both SG&A expenses and other operating costs.
Income Statement: A financial statement that shows a company’s revenues and expenses over a specific period, resulting in net profit or loss.
Overhead Costs: Indirect costs related to running the company that cannot be directly tied to the production of goods or services.
Gross Profit: The profit a company makes after deducting the cost of goods sold from total revenue.

Online References

Suggested Books for Further Studies

Cost Management: A Strategic Emphasis by Edward Blocher, David Stout, Paul Juras, Gary Cokins.
Financial Accounting by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas, Themin Suwardy.
Principles of Accounting by Belverd E. Needles, Marian Powers.

Fundamentals of Selling, General, and Administrative (SG&A) Expenses: Business Accounting Basics Quiz

### What do SG&A expenses include? - [x] Salespersons' salaries and commissions, advertising and promotion, office payroll and expenses, executives' salaries. - [ ] Cost of goods sold, financing costs, income taxes. - [ ] Only advertising and promotion expenses. - [ ] Only office payroll and executives' salaries. > **Explanation:** SG&A expenses include salespersons' salaries and commissions, advertising and promotion, travel and entertainment, office payroll and expenses, and executives' salaries. ### Where are SG&A expenses reported? - [ ] On the balance sheet. - [x] On the profit and loss statement. - [ ] In the statement of retained earnings. - [ ] In the cash flow statement. > **Explanation:** SG&A expenses are reported on a company's profit and loss statement. ### Which type of expenses are NOT included in SG&A? - [ ] Executives' salaries - [ ] Advertising and promotion - [x] Financing costs - [ ] Office payroll and expenses > **Explanation:** Financing costs are not included in SG&A expenses; they are separately categorized. ### Why are SG&A expenses important to a business? - [ ] They solely determine the company's profitability. - [x] They are crucial for running the company's daily operations. - [ ] They include all production costs. - [ ] They determine the company's tax liabilities. > **Explanation:** SG&A expenses are important because they represent the costs associated with running the company's daily non-production operations. ### How can companies reduce SG&A expenses? - [x] By optimizing staff levels and reducing travel costs. - [ ] By increasing production costs. - [ ] By adding more executive positions. - [ ] By investing more in advertising alone. > **Explanation:** Companies can reduce SG&A expenses by optimizing staff levels, reducing travel costs, and negotiating better terms with suppliers for office supplies. ### Do SG&A expenses include income taxes? - [x] No - [ ] Yes - [ ] Sometimes - [ ] Only if certain conditions are met > **Explanation:** SG&A expenses do not include income taxes; they are reported separately. ### Which costs are directly associated with the production of goods? - [ ] Travel and entertainment expenses - [ ] Office supplies - [x] Cost of goods sold (COGS) - [ ] Advertising expenses > **Explanation:** The cost of goods sold (COGS) is directly associated with the production of goods. ### What financial statement includes SG&A expenses? - [ ] Balance sheet - [x] Income statement (profit and loss statement) - [ ] Cash flow statement - [ ] Statement of retained earnings > **Explanation:** SG&A expenses are included in the income statement, also known as the profit and loss statement. ### What aspect of a company's operations do SG&A expenses support? - [ ] Only executive levels - [ ] Only production levels - [x] Day-to-day business operations - [ ] Only financing activities > **Explanation:** SG&A expenses support the day-to-day business operations, including administrative and sales functions. ### Can SG&A reduction strategies include virtual meetings? - [x] Yes - [ ] No - [ ] Only if increased travel occurs - [ ] Only during the fiscal year-end > **Explanation:** SG&A reduction strategies can include having more virtual meetings to minimize travel and entertainment costs.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!

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