Selling and Administrative Expense Budget Preperation
Developing the Operating Budget
The selling and administrative expense budget makes up part of a company's pro forma, or budgeted, profit and loss statement. This portion of the budget includes the planned operating expenses for the business, excluding its direct costs of manufacturing. The company's manufacturing costs get classified as "Cost of Goods Sold" and have their own category on the budgeted profit and loss statement.
Selling and administrative costs, also known as selling, general, and administrative (SG&A) costs, including expenses associated with running the overall business, such as the costs for clerical labor, rent, office supplies, and other overhead.
A company's master budget profit and loss statement include these expenses along with sales revenue, cost of goods sold, and other expenses, such as interest and depreciation.
What Types of Expenses Qualify?
Selling and administrative expenses appear on a company's income statement, right under the cost of goods sold. Typical company expenses from accounting, legal, sales, marketing, facilities, and other corporate activities fall into this category. These costs may be fixed or variable; for example, sales commissions are a variable selling expense dependent on the level of sales the sales staff achieves. However, the sales force also receives fixed base salaries, which stay the same regardless of any changes in the sales level. The office building or warehouse rent is a fixed administrative expense, while the cost of office supplies and utility expenses count as variable administrative expenses.
For expense items that stay unchanged over time, budgeting simply requires determining the annual amount, determined from the prior year and adjusted for any projected changes and then divided into quarters or months to populate the new budget.
When constructing a budget for variable expenses, it's important to use a process that addresses costs that could increase or decrease depending upon the level of sales in a given time period.
For example, sales commission expense varies each month based on the number of units sold. The company may also have more salespeople and sell more units during a certain season. Employee travel expenses, advertising, and marketing may also change from one month to the next due to seasonality, new product launches, increased employee travel, and other events.
The Budget Preparation Process
To prepare a budget, a company must first decide on the unit of time to use. A budget calculated on a monthly basis usually has a good level of detail factored into it, while some companies prefer a higher-level quarterly-basis budget. Since some of the company's expenses vary with sales, the projected number of units to be sold becomes the budget's starting point. Analysts gather information to estimate the approximate variable costs per unit sold and use this to drive the monthly expense calculations for the variable cost budget. For fixed expenses, the costs are entered into the budget by month with no variation.
The ArtCraft Pottery Company produces reproductions of famous art pottery. To develop the selling and administrative (S&A) expenses portion of ArtCraft Pottery's budget, the calculation begins with an estimate of the number of units of pottery the company projects it will sell in each quarter of the next year.
The company knows, from the previous history, that its variable S&A expenses average out to $0.10 per unit sold. Fixed salaries cost about $1,400 per quarter. The company estimates advertising costs for quarters 1 through 4 as $100, $200, $800, and $500, respectively, based on the previous year's spending.
|ArtCraft Pottery Selling and Administrative Expense Budget|
|Units to Be Sold||1,000||1,200||1,500||2,000||5,700|
|Variable S&A Expenses per Unit||x0.10||x0.10||x0.10||x0.10||x0.10|
|Total Variable Expenses||$100||$120||$150||$200||$570|
|Fixed Selling and Administrative Expenses:|
|Total Fixed Expenses||$1,720||$1,820||$2,420||$2,120||$8,080|
|Total S&A Expenses||$1,820||$1,940||$2,570||$2,320|