por What are selling expenses?
The selling expenses are those produced when products or services are promoted and marketed to customers. These expenses can include everything from advertising campaigns and store displays to shipping products to customers.
Therefore, any expense associated with the sale of a product is considered a sales expense. They are one of the three types of expenses that make up the operating expenses of a business. The others are administrative expenses and general expenses.
They can be broken down into direct and indirect expenses, associated with the sale of a product.
Directs only occur when the product is sold, such as shipping supplies, delivery charges, sales commissions, travel, and any lodging of an online sales representative with a sale.
Overheads are expenses that can be thought of as money used to make sales. It is not necessary to sell an item to incur an overhead. They include advertising and product marketing, telephone bills, travel expenses, and salaries of administrative sales personnel.
When are there sales expenses?
Every time a product or service is sold, there are expenses associated with the activities that generate the sales revenue. However, sales implementation and fulfillment are not considered sales expenses.
For example, if a business sells solar panels, the selling expense is not the cost of producing the solar panel or installing the solar panel.
It’s strictly the expenses involved with the person who heads into a neighborhood and spends all day knocking on doors until they get someone to buy the panels.
That seller’s salary, commission, mileage, and parking will be included in the selling expense.
Some components of selling expense may change as sales volume increases or decreases, while others remain stable. Therefore, these expenses are considered as semi-variable expenses.
Administrative expenses
The income statement groups general and administrative expenses into a single category. These are all expenses not associated with the sale or manufacture of the product.
For example, the same solar panel company has general and administrative expenses in the form of rent for the administrative office, administrative staff, utilities, insurance, office supplies, and administration-related expenses.
Cost of goods sold
An expense not included in selling or administrative expenses will be a cost of merchandise sold. All costs paid to manufacture the product sold.
For example, the company that sells solar panels has a production facility in Taiwan, where it manufactures them. The rental, labor, and supply costs to manufacture these solar panels are costs of goods sold.
Importance of differentiation
You must understand how each of these categories of expenses affects the profitability of the company. When sales decline, you must consider where the money is being used and whether it is being spent on something you don’t need.
Implementing expense controls could mean reducing administrative expenses, cutting support staff, and redirecting efforts to marketing.
You can also adjust the costs of merchandise sold, seeking to reduce the costs of the product to increase the profit margin.
When production exceeds what is being sold, production must be reduced or more sales generated, reducing overhead until the company finds a balanced operating point.
Accounting management of sales expenses
Selling expenses are reported in the income statement, in the section corresponding to operating expenses, which is located below the cost of merchandise sold.
They are classified as indirect expenses on the company’s income statement, because they do not contribute directly to the manufacture of a product or provision of a service.
These expenses can be fixed or variable. For example, sales commissions are a variable selling expense that depends on the level of sales salespeople achieve.
However, the sales force also receives fixed base salaries, which remain the same regardless of any change in the level of sales.
Selling expenses are traditionally listed before general and administrative expenses, because investors and creditors are often more concerned with expenses related to generating income.
General and administrative expenses are still important, but they do not produce sales.
Budget
For expense items with no change over time, the budget simply requires stating the annual amount, determined from the prior year and adjusted for any projected changes.
For variable expenses, it’s important to use a budget process that addresses expenses that could increase or decrease based on the level of sales over a given period of time.
For example, sales commission expenses vary each month, depending on the number of units sold. The company could also have more sellers and sell more units during a given season.
Travel, advertising, and marketing expenses could also change from month to month for a variety of reasons, including seasonality, new product launches, increased salesperson travel, and other events.
Examples of Selling Expenses
Selling expenses include all expenses incurred by the sales department. Among these expenses are the following:
– Wages and salaries of vendors and sales administrative staff.
– Sales commissions.
– Payroll taxes.
– Benefits.
– Travel and meals.
– Rental of sales facilities / showrooms.
– Depreciation of sales department equipment.
– Advertising and promotional materials.
– Supplies and use of the telephone in the sales department.
– Other departmental administrative expenses.
If the marketing function is merged with the sales department, then various marketing expenses may be included in the above list, such as costs of developing advertising campaigns and costs incurred for artwork to run promotions.
Variations in selling expenses
The proportion of expenses incurred can vary substantially depending on the sales model used, and depending on the business.
For example, a custom product will require considerable staff time to obtain sales leads and develop budgets, thus requiring large compensation plus travel expenses.
Alternatively, if the majority of sales are transferred to outside sellers, commissions may be the largest component of selling expenses.
An online store may have little selling expense, but will incur large marketing expenses to advertise the site and promote it through social media.
References
Steven Bragg. Selling cost | Sales expense. Taken from accountingtools.com.
What are Selling Expenses? Taken from myaccountingcourse.com.