Hupana Running Company knows all about production, and we have a good handle on how many pairs of shoes we are going to make, and how much raw materials and overhead go into each pair. Our sales commissions, marketing plans, data entry personnel, insurance, property taxes and all the other stuff that goes into operating a business. Selling expenses play a pivotal role in shaping the business strategy of any organization. These expenses are not merely numbers on a balance sheet; they are a reflection of the company’s commitment to growth, market presence, and customer engagement. In the context of a master budget, selling and administrative expenses are forecasted to ensure that the company’s strategic objectives align with its financial capabilities.

SG&A accounts for the costs that are essential to running the business, such as rent, salaries, office supplies, and more. COGS differs from SG&A in that it includes the expenses necessary for product manufacturing, such as labor, materials, etc. Selling expenses are direct, meaning at the time of the sale, as well as indirect, meaning before and after the sale. General and administrative expenses refer mainly to the day-to-day overhead costs. Direct expenses are those incurred at the exact point-of-sale for a product or service. Examples of direct selling expenses include transaction costs and commissions paid on a sale.

By keeping close tabs on SG&A expenses, a company can more efficiently manage its overhead, make cost-cutting decisions, and remain profitable. The SG&A sales ratio can be used to monitor the trends of a company’s SG&A expenses in relation to sales, providing insight into profit or helping benchmark to industry averages. Sometimes, operating expenses are listed under an “operating expenses” heading, though this is not always the case, as seen in these examples. Selling expenses are listed in the form of “marketing,” and “general and administrative” has an individual line item.

Project (Program) Budgets

The goal is to transform these expenses from a passive ledger entry into an active tool for strategic development. In the intricate web of budget planning, compliance and legal considerations stand as critical pillars that uphold the integrity and feasibility of financial strategies. These considerations are not mere formalities; they are the bedrock upon which sustainable and ethical budgeting practices are built. As we delve into the realm of selling and administrative expense budgets, it becomes increasingly clear that overlooking these aspects can lead to dire consequences, ranging from financial penalties to reputational damage. From the perspective of a CFO, the adherence to legal standards ensures that every dollar allocated is justified and falls within the bounds of regulatory frameworks. For auditors, it’s the assurance that the numbers on the ledger are not just figures but reflections of lawful and compliant transactions.

Example of the Sales and Administrative Expense Budget

The accountant who is involved with external use reports has a duty to utilize appropriate care in preparing them; there must be a reasonable basis for the underlying assumptions. In addition, professional standards dictate the reporting that must accompany such reports if they are to be released for external use. Those reporting standards become fairly complex, and the specifics will depend on the nature of external use.

How to Calculate SG&A Expense

Once they perform this allocation, the budgeted income statement can be prepared. It also estimates that $22,000 of its income will not be collected and will be reported as uncollectible expense. In a merchandising firm, retailers do not produce their inventory but purchase it. When determining the number of units needed to be produced, start with the estimated sales plus the desired ending inventory to derive the maximum number of units that must be available during the period. Since the number of units in beginning inventory are already produced, subtracting the beginning inventory from the goods available results in the number of units that need to be produced.

However, since it is a simple way to create a budget, it is the most common method for doing so, especially in companies that are not under significant competitive pressure to cut costs. Given the direct labor hours for each quarter from the direct labor budget, the variable costs are the number of hours multiplied by the variable overhead application rate. The fixed costs are the same for each quarter, as shown in the manufacturing overhead budget in Figure 7.11.

Short-term Plans

This granular internal reporting helps businesses understand the composition of their overhead and operational support functions. Each of the budgets/worksheets presented thus far are important in their own right. They will guide numerous operating decisions about raw materials acquisition, staffing, and so forth. But, at this point, it is very difficult to assess the success or failure of Shehadeh’s plans!

• As mentioned earlier, it is also assumed that Shehadeh is planning to purchase new production equipment at the end of the second quarter, as shown on row 15 following.
• This presentation helps financial statement users distinguish between the direct costs of producing goods (Cost of Goods Sold) and the indirect costs of running the business.
• In a merchandising firm, retailers do not produce their inventory but purchase it.
• Not everyone has the same income, responsibilities, or needs, so a cookie-cutter budget might not be effective.

• Determining a company’s revenue growth rate, and also understanding how that rate can be manipulated at smaller firms.
• It’s a strategic jigsaw puzzle where every piece must fit perfectly to complete the picture of a successful, thriving business.
• Tracking and managing direct labor rates can help a company maximize efficiency.
• If this is the case, then gross profit less SG&A equals pre-tax profit, also known as earnings before taxes (EBT).

The direct materials budget illustrates how much material needs to be ordered and how much that material costs. The calculation is similar to that used in the production budget, with the addition of the cost per unit. Whether indirect or direct selling costs, general expenses like rent and utilities, or administrative costs like salaries and legal fees, SG&A costs are essential. As an operating expense, SG&A includes essential expenses for a company’s day-to-day operations yet excludes COGS and any costs related to producing goods and services.

How managers use this information

On one hand, sales are the frontline of revenue generation, the driving force behind market expansion and customer acquisition. On the other, administrative expenses, though less glamorous, are the backbone that supports the entire operation, ensuring smooth and efficient business processes. In conclusion, a selling and administrative expense budget is a crucial tool for companies to manage their sales and administration costs and plan their activities.

But, those reports will necessarily include language that makes it very clear that the participating selling and administrative expense budget accountant is not vouching for their achievability. Determining a company’s revenue growth rate, and also understanding how that rate can be manipulated at smaller firms. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .

A sales manager, on the other hand, might view it as a blueprint for resource allocation, ensuring that the sales team has the necessary tools and support to meet their targets. Meanwhile, an operations manager might see it as a forecast to plan for the administrative support needed to keep the business running smoothly. Non-operating expenses are costs incurred by a business that are unrelated to core operations. SG&A expenses are usually already calculated on the income statement by adding up selling expenses and general and administrative expenses. If you need to calculate SG&A yourself, such as for your own business, keep in mind the above tips.