Learning Outcomes
- Prepare a selling, general, and administrative budget
The costs of selling a product are often closely related to the sales forecast. Generally, the higher the forecast, the higher the selling expenses. This relationship is also the inverse—there is a relationship between the amount spent on marketing and sales revenue. More advertising may mean more sales, but that is not always the case. For instance, if the competition is robust, or if the market is saturated, increasing advertising and other marketing expenses may not increase sales. However, some costs have a direct relationship to sales. Commissions are a good example of this.
Administrative expenses are likely to be less dependent on the sales forecast because many of the items are fixed costs (e.g. salaries of administrative personnel and depreciation of administrative buildings and office equipment). Managers must also estimate other expenses such as interest expense, income tax expense, and research and development expenses.
For GelSoft, the administration will look at selling, general, and administrative costs both historically and prospectively, applying cost increases and cost-cutting measures to the costs or using a zero-based budgeting process that looks at the budget for each year as if it was the first year, taking current and proposed costs and building the budget from scratch.
For instance, the company has seven full-time, non-commissioned sales staff making $50,000 each year and plans to add three more during the year. The first two are hired April 1 and one more on July 1, so gross sales salaries would be (7 * $50,000) + (2* $50,000 * ¾) + ($50,000 * ½) = $450,000.
Similarly, if the CEO makes $500,000, and the CFO makes $300,000, and they have three support staff each making $50,000, total general and administrative salaries would be $950,000. Rent, depreciation, and other expenses could be forecast using similar calculations based on contracts and commitments as well as planned expansion or contraction.
Description | Amount |
---|---|
Sales Salaries | $ 450,000 |
General and Administrative Salaries | 950,000 |
Payroll Taxes and Benefits | 120,000 |
Depreciation on Office Equipment | 100,000 |
Rent and Property Taxes | 150,000 |
Office Repairs and Maintenance | 50,000 |
Miscellaneous Expenses | 30,000 |
Total Selling, General, and Administrative Expenses | Single Line$ 1,850,000Double line |
Before you move on to completing the operating budget from this information, check your understanding of the selling, general, and administrative budgeting process.