SG&A

What is SG&A?

Selling, General & Administrative, also known as SG&A, are the non-production expenses that appear in a company's income statement. It includes costs of rent, marketing, technology development, advertisement, etc.

Expenses related to sales of a company can be categorized into direct costs and indirect costs. Direct costs are directly related to the production of goods or services. Indirect costs are spent on items that can help the selling process but are not related to the production process.

A typical example of SG&A is the cost of marketing and advertisement. These two expenses do not contribute to nor affect the production of the goods. Nevertheless, they are beneficial to the sales of the company, thus increasing total revenue. Therefore, they are both categorized under SG&A.

An item worth noticing under SG&A is the wages of employees. If a group of employees does not contribute to the manufacturing process of the business, their wages should be grouped into SG&A. Otherwise, their wages are counted as a direct cost (COGS).

SG&A plays an essential role for business operators because reducing SG&A could be a good strategy to reduce costs and at the same time, not interrupt the manufacturing process as much.

By subtracting SG&A, Depreciation, and Amortization from gross profit, Operating Income & EBIT is calculated. Another way of looking at it is to subtract all the direct and indirect costs related to the core business from revenue. Operating income, as its name indicates, measures the success of a business's operation.