How operating expenses and cost of goods sold differ?
Managing this section of the income statement is a crucial component to running a successful business. Administrative expenses are the expenses an organization incurs not directly tied to a specific function such as manufacturing, production, or sales. These expenses are related to the organization as a whole as opposed to an individual department or business unit. Salaries of senior executives and costs associated with general services such as accounting and information technology (IT) are examples of administrative expenses.
They are more fixed than selling costs because they include rent or mortgage on buildings, utilities, and insurance. G&A costs also include salaries of personnel in certain departments, other than those related to sales or production. Selling, general and administrative expense (SG&A) is reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses (G&A) of a company. SG&A, also known as SGA, includes all the costs not directly tied to making a product or performing a service.
A portion of administrative expenses are typically fixed in nature as they are incurred as part of the foundation of business operations. These expenses would exist regardless of the level of production or sales that occur. For example, some minimum level of electricity will always be used by a business just to keep the lights on and necessary machines running. EBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income.
What are General and Administrative Expenses?
That is, SG&A includes the costs to sell and deliver products and services and the costs to manage the company. In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit, unlike operating expenses such as raw material and labor. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities.
Selling and administrative expenses are typically a huge line item on a company’s income statement. It includes most every expense the company incurs not directly related to the production of its products. Whether a company wants to grow, cut costs, or simply maintain what it’s doing, managers must pay close attention to this figure and all its component parts.
An entity may utilize the sales-to-administrative ratio to gauge the portion of sales revenue attributable to covering administrative costs. General and administrative (G&A) expenses are listed below cost of goods sold (COGS) on a company’s income statement. The top section of an income statement always displays the company’s revenues for the given accounting period. The general and administrative expenses are then deducted from the gross margin to arrive at net income.
The depreciation on the sales staff’s automobiles is considered part of the company’s selling expenses. The depreciation on a manufacturer’s factory and production equipment will be included in the overhead cost of the product. When a manufacturer’s products are sold, some of the depreciation will be included in the cost of goods sold. When some of the manufactured products are held in inventory, some of the depreciation associated with the manufacturing process will be included in the cost of the inventory.
In short, all the expenses that are revenue in nature and have a supporting role in the operations of business are operating expenses. It is important to understand that the expenses incurred on the initial repairs of the asset to make it useable or the legal costs in the acquiring of assets are not operating expenses. Similarly, the costs incurred in the issuance of shares, debentures are also capital expenditures, and they cannot be treated as operating expenses and deducted from the income statement.
Operating expenses include such things as payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs, and taxes. These expenses are usually subdivided into selling expenses and administrative and general expenses. For example, the depreciation on the building and furnishings of a company’s central administrative staff is considered an administrative expense.
For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Overheads are also very important cost element along with direct materials and direct labor. Administrative expenses are the expenses which are not attributable to direct production or delivery of the products or services of a company. These expenses include salaries of senior employees, accounting and finance cost, HR expenses etc. These are non-operating expenses necessary to maintain the basic operations of a company.
- General and administrative (G&A) expenses are incurred in the day-to-day operations of a business and may not be directly tied to a specific function or department within the company.
What is included in general and administrative expenses?
General and administrative expenses are costs that contribute to the overall operations of the company and can’t really be directly related back to selling or making sales. These expenses include things like overhead, management salaries, accounting fees, and other expenses used to run the business.
These expenses are also called central expenses and are vital to maintain proper functioning of a company and increase efficiency of operations. In other words, these expenses are somewhat fixed and the company needs to incur regardless of the level of sales.
What Are General and Administrative Expenses (G&A)?
General and administrative (G&A) expenses are incurred in the day-to-day operations of a business and may not be directly tied to a specific function or department within the company. General expenses pertain to operational overhead expenses that impact the entire business. Administrative expenses are expenses that cannot be directly tied to a specific function within the company such as manufacturing, production, or sales. G&A expenses include rent, utilities, insurance, legal fees, and certain salaries. G&A expenses are incurred in the day-to-day operations of a business and may not be directly tied to any specific function or department within the company.
Because G&A expenses may be eliminated without direct impact on the production or sale of goods and services, management has strong incentive to minimize these types of expenses. Companies with centralized management typically experience higher G&A expenses compared to companies with decentralized management structures. The sales to administrative expense ratio compares a company’s sales revenue to the amount of expenses incurred in supporting operations.
For example, for a printing company a printer would be considered a manufacturing overhead. Overhead expenses are all costs on the income statement except for direct labor, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
For example, fees and interest may be classified as their own line item when deducting expenses to arrive at net income. This includes office equipment such as printer, fax machine, computers, refrigerator, etc. They are equipment that do not directly result in sales and profits as they are only used for supporting functions that they can provide to business operations. However, equipment can vary between administrative overheads and manufacturing overheads based on the purpose of which they are using the equipment.
How Do Operating Expenses Affect Profit?
Simply put, selling and administrative expenses are all the expenses not directly related to the production of a product. That includes the budgets of all non-manufacturing departments such as marketing, accounting, sales, engineering, and so on.
The cost of a sales team’s phones, computers and office supplies are sales expenses. Some companies apportion part of their G&A to their sales function to determine the true cost of having an in-house sales department. For example, if the sales team takes up 10 percent of the company’s office space, the business includes 10 percent of its rent and utilities as sales expenses. If a company breaks out its sales costs in its general and administrative expenses, it would list its sales team costs as a separate category within general and administrative. An expense incurred in carrying out an organization’s day-to-day activities, but not directly associated with production.
Because administrative expenses may be eliminated without direct impact on the product being sold or produced, they are typically the first expenses identified for budget cuts. There is strong motivation from management to maintain low administrative expenses relative to other expenses as an organization may utilize leverage more effectively with lower administrative costs.
EBIT is also sometimes referred to as operating income and is called this because it’s found by deducting all operating expenses (production and non-production costs) from sales revenue. SG&A includes all non-production expenses incurred by a company in any given period. This includes expenses such as rent, advertising, marketing, accounting, litigation, travel, meals, management salaries, bonuses, and more. On occasion, it may also include depreciation expense, depending on what it’s related to.