The 4-1-1 on the cost of sale (2023)

Every business has selling, general, and administrative (SG&A) expenses, which are often part of the company's operating expenses. SG&A can be compared to sales to show if the company is overspending (or underspending) on ​​operating expenses compared to the amount of products it sells or services it provides.

What are selling expenses?

TheSstands for selling expenses, which includes the costs of advertising, selling and delivering goods and services. Selling expenses are things like sales collateral, travel to customers or prospects, advertising expenses, and salespeople's salaries and commissions.

The central theses

  • Selling expenses are distinct from the expenses that make up cost of sales (COGS) or cost of sales.
  • Selling expenses are an area that should be closely monitored for growth opportunities and cost savings.

Distribution costs explained

COGS are alldirect costs related to the manufacture or acquisition of products for sale. For a manufacturer, this would include raw materials, the cost of transporting the materials to the manufacturing facility, and the wages of the people making them.

Selling costs, on the other hand, are indirect costs — the things that are needed to sell the finished product or service. Selling expenses include the costs associated with receiving orders for the products or services as well as getting those things into the customer's hands, as opposed to COGS, the explicit costs of producing the product or service. The seller's salary, that person's commission, the cost of marketing materials they use in the sale, travel expenses related to customer visits, and delivery costs are all selling expenses.

Selling expenses vs. administrative expenses

The expenses include – in addition to the expenses from the sale – the general administration costs. General and administrative expenses are often grouped together under the term “corporate”. They are the costs associated with people and infrastructure not selling things or providing services in the field, but providing support for all of these activities. This includes human resources, IT, accounting, finance and billing functions, as well as the infrastructure for the business – rent, utilities and more.

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main differences

selling expenses administrative expenses
sales salaries and commissions Corporate Salaries: Human Resources, IT, Accounting
Warehouse lease Rent at headquarters
Warehouse Utilities Central Utilities
Insurance for warehouses Insurance for the headquarters
Marketing and Promotional Material mailings to employees
Repair to delivery truck Desks and chairs in the corporate office
Depreciation on vans Depreciation on a photocopier

Why is it important for companies to track sales expenses?

By tracking the cost of sales, a company can:

Assess the tax burden correctly:Tracking selling expenses is important for tax compliance and to ensure the business calculates deductions correctly to reduce its tax burden.

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Control expenses:While companies often begin cost-cutting efforts in the general and administrative areas, the elements in the selling expenses area offer some of the greatest opportunities to better control costs. For example, travel expenses are selling expenses, which are a cost containment opportunity. Accenture research shows that travel accounts for 10% to 12% of a company's annual budget and accounts for about 1% of its revenue.

Start developing KPIs:Accurate cost of sales helps the company understand key sales metrics such as:Customer Acquisition Cost (CAC). This is calculated by dividing the total cost of customer acquisition by the total number of customers acquired for a given period.

types of distribution costs

Let's look at the types of selling expenses that the fictional Bella's Ballet Supply store uses.

The cost of selling in this example includes the seller's salary, commission, shipping and transportation costs to deliver the slippers, money spent on creating marketing materials and advertising.

Examples of distribution costs

Let's look at the differences in operating costs required to run Bella's ballet supply business. Bella's corporate headquarters are in New York City and it has a very small manufacturing facility in Stamford, Connecticut. Bella has 10 employees in the company covering all typical business functions plus five sales representatives.

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One of the sales reps recently traveled to Green Bay, Wisconsin and sold 100 pairs of ballet shoes. She brought a laptop to show a video testimonial from a satisfied client and distributed printed marketing materials. This sale satisfied the quota for a sales commission processed by an accountant at headquarters. The slippers were made and shipped to the customer.

In this example, the salesperson's salary and commission are selling expenses. Add to that the cost of marketing materials. The salaries of employees who work at the company but are not in sales or marketing functions, as well as depreciation on the computer used by the sales employee, are general and administrative expenses. Note that depreciating the computer would be an expense, but not the computer itself - this may seem semantic, but assets and expenses are separate and distinct categories.

The costs associated with making the slippers fall under the manufacturing cost, while the cost of shipping them to the customer is a selling cost.

Selling Cost Analysis

In addition to reducing labor and material costs, selling and administrative expenses are an excellent place to look for savings since they take up a large chunk of a company's operating budget. Mentioning them is a staple of earnings calls, most recently in conjunction with a phrase like "discretionary spending cuts" related to those line items. Controlling these costs as demand for a product or service increases is critical to a company's profitability, but finding a balance is critical to sustaining that growth.

One way to use cost of sales as part of a profitability analysis is the ratio of SG&A to sales. Divide SG&A by gross profit (revenue less cost of goods sold) to get the percentage of gross profit that goes into SG&A expenses. There's no set number as to what that should be. It will vary by industry as well as the consistency of the gross profit figure overall.

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However, within the SG&A bucket, a study showed that the best wholesalers focus their spend on the sales category, including investments in sales force, account management, and the technology to support it all.

Is depreciation a sales expense?

In this example, what if Bella bought a truck to deliver the slippers to customers within 500 miles of Stamford to reduce third-party logistics costs? In this case, would depreciation be a sales expense?

The truck itself would be a depreciated expense under selling expenses. If the truck cost $40,000 and depreciated over five years, each income statement would reflect a depreciation expense of $8,000 per year.

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How to calculate selling expenses for your business

The general ledger contains all the information needed to calculate sales expenses. However, as the company sells more products in more regions and potentially in more currencies, this becomes increasingly complex when it comes to basic small business software - increasing the need foradvanced accounting softwarethis to reduce the time and resources required. CFOs surveyed by NetSuite Brainyard say they spend 2.25 hours a day on spreadsheets and that better, faster reports are a top priority. Better integration between accounting, sales and inventory and order management systems will result in more accurate and streamlined accounting processes for the finance team.


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