What is Selling, General, and Administrative Expense ?
1942 reads · Last updated: December 5, 2024
Selling, general, and administrative expenses (SG&A) include all non-production expenses for a reporting period. Examples of these expenses are marketing, advertising, rent, and utilities.This line item includes nearly all business costs that aren't directly attributable to making a product or performing a service. SG&A consists of the costs of managing a company and the expenses of delivering its products or services.
Definition
Selling, General and Administrative Expenses (SG&A) include all non-production costs incurred during the reporting period. Examples of these expenses are marketing, advertising, rent, and utilities. SG&A consists of the costs of managing the company and delivering its products or services.
Origin
The concept of SG&A originated from corporate accounting practices to help companies better categorize and manage their operational costs. As companies grew in size and complexity, SG&A became a crucial part of financial statements to more clearly display a company's financial health.
Categories and Features
SG&A is typically divided into three main categories: selling expenses, general expenses, and administrative expenses. Selling expenses include costs directly related to selling products or services, such as advertising and promotional activities. General expenses refer to basic expenditures necessary for the daily operations of a business, like rent and utilities. Administrative expenses cover management salaries, office equipment, and other management-related expenditures. Each category has specific application scenarios and pros and cons; for instance, excessively high selling expenses might affect profitability, while too low administrative expenses could lead to decreased management efficiency.
Case Studies
Case 1: Apple Inc. details its SG&A expenses in its financial statements, showing significant spending on marketing and advertising, which has helped Apple enhance its brand recognition globally. Case 2: Walmart has successfully maintained a low-cost operation by tightly controlling its SG&A expenses, particularly in rent and utilities, thus maintaining a competitive edge in the retail industry.
Common Issues
Investors often misunderstand the direct relationship between the level of SG&A expenses and a company's profitability. In reality, the appropriateness of SG&A expenses depends on the company's business model and industry standards. Excessively high SG&A expenses may indicate inefficiencies in management and operations, while excessively low SG&A expenses might suggest insufficient investment in marketing and management.
