Selling, General, and Administrative Budget

Learning Outcomes

  • Prepare a selling, general, and administrative budget

A flowchart titled “Types of Budgets”. The SG&A budget is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the financial budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash 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.

GelSoft
Selling, General, and Administrative Budget
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.

Practice Question