Determining Selling and Administrative Costs in Managerial Accounting: A Guide
Financial accounting is widely known for producing financial reports and standards used to evaluate a company's financial performance every quarter and year, targeting investors. In contrast, managerial accounting is geared towards the company's internal management, focusing on internal processes and objectives instead of reporting to investors.
When it comes to managerial accounting, selling and administrative expenses are a significant area of consideration, given the management's control.
What are selling and administrative expenses?
Selling and administrative expenses are generally expenses not associated with the manufacture of a product. This category encompasses budgets for all non-manufacturing departments, including marketing, accounting, sales, engineering, and so on. The scope includes personnel expenses, operating expenses like insurance, supplies, travel and entertainment, rent, payroll taxes, and even non-cash expenses such as depreciation and amortization.
Calculating selling and administrative expenses involves adding up all expenses unrelated to the company's product production.
For managerial purposes, the selling and administrative budgets and expenses are frequently reviewed on a monthly, quarterly, and annual basis.
How managers utilize this information
Much more customizable than financial accounting, managerial accounting offers a wealth of practical tools for managers - particularly in sales and administrative expenses.
As it turns out, selling and administrative expenses include a diverse range of expenses. You'll find both highly variable expenses, like marketing, and primarily fixed expenses like rent. Analyzing these expenses requires distinguishing between a company's fixed baseline costs and its fluctuating variable costs. Variable expenses might correlate with sales, headcount, or capital spending, tile analysis must delve into this granularity to fully grasp how a company's strategy and tactics will influence its expenses.
Subdividing the "selling and administrative" expenses into smaller, more manageable subgroups is essential. For example, a company's marketing budget would be analyzed separately from its engineering expenses. It can be beneficial to review marketing and sales expenses together as one group relative to sales or sales growth. The managers' discretion based on the company's business model and objectives should guide these choices. Managerial accounting lacks regulated standards: the reports and modeling should be tailored to the company's management needs, rather than catering to investors' understanding of the company's performance.
Granted, these managerial decisions hold considerable weight in driving investor returns. These reports set the tone for management's perspective of the business. The way management groups and analyzes expenses communicates their perspective and understanding of the company, shaping their decision-making process. A poorly structured selling and administrative expense budget can influence not just tactics but also strategy.
Related investing topics
Employer-Sponsored Plans for Retirement
Employers can help employees save for retirement with these options.
How to Calculate Direct Labor Rates in Accounting
Tracking and managing direct labor rates can improve efficiency.
GAAP vs. Non-GAAP: Everything You Need to Know
Public companies should comply with generally accepted accounting principles; however, they might also employ their unique accounting practices.
How to Calculate Total Revenue Growth in Accounting
Determine a company's revenue growth rate and learn how it can be manipulated at smaller firms.
Analysis
Managers must not only calculate selling and administrative expenses but also analyze them
Selling and administrative expenses typically constitute a substantial portion of a company's income statement. These expenses encompass almost every payment a company makes, not directly linked to the manufacture of its products. Whether a company aims to grow, reduce costs, or maintain its status quo, managers should pay close attention to this figure and its components. Managing this section of the income statement is instrumental to the success of any business.
Skilled investors must closely monitor an abundance of metrics. If you're eager to advance in your investment journey, seize this opportunity at our Broker Center, where we'll be more than happy to assist.
Our website has a disclosure policy.
Managers can use the analysis of selling and administrative expenses to make informed decisions about cost reduction or allocation, potentially impacting the company's overall profitability.
Investors may consider selling and administrative expenses ratio when evaluating a company's financial health and efficiency, as it indicates how effectively a company uses its resources to generate revenue.
