Selling and administrative expense budget

Typical categories of selling and administrative expenses

Selling and administrative expenses often fall into specific categories based on their purpose and nature, aiding in clearer budget organization and analysis. Each expense is classified as fixed or variable depending on whether it has a specific cost driver or varies with sales volume or activity levels.

Selling expenses

Selling expenses are those directly related to the promotion, distribution, and sales of products. Common categories include:

• Sales commissions: Payments to sales personnel based on units sold, often a variable expense.
• Advertising and marketing: Costs for promotions and campaigns, which may vary depending on planned marketing activities.
• Shipping and delivery: Costs to deliver products to customers, typically a variable expense driven by sales volume.
• Customer service: Costs related to handling inquiries and resolving customer issues, which can be variable or fixed based on volume.

Administrative expenses

Administrative expenses support the organization’s general operations and are typically broader in scope. Categories often include:

• Salaries of administrative staff: Salaries for management, HR, and support staff, often fixed within the relevant range.
• Office supplies: Materials and supplies required for daily operations, often variable depending on usage.
• Rent and utilities: Costs for office space and basic utilities, generally fixed but can vary if operations expand.
• Professional fees: Costs for legal, consulting, and audit services, which may be either fixed or vary with specific projects.

Impact of the S&A budget on contribution margin (CM) analysis

The selling and administrative (S&A) budget plays a crucial role in refining the contribution margin analysis by including variable costs directly tied to sales activities. When variable S&A expenses are factored in, the contribution margin per unit becomes a more accurate reflection of profitability by deducting all variable expenses associated with production and sales.

By including variable S&A expenses in contribution margin calculations, companies can gain a clearer view of its profitability, considering both production and non-production-driven variable costs. This adjusted contribution margin aids in setting more precise performance targets, managing profitability expectations, and planning for desired profit levels after covering both variable and fixed costs.

The S&A budget is typically divided into two primary components:

1. Variable selling and administrative costs: These expenses vary directly with the volume of units sold.
2. Fixed selling and administrative costs: These costs remain constant within the relevant range, irrespective of sales volume.

Example: GreenLine Furniture - Q4 selling and administrative expense budget

For GreenLine Furniture, the budgeted variable and fixed expenses for Q4 are as follows. In this example, variable costs like sales commissions, shipping, and office supplies depend on the projected sales volume of 5,000 units for Q4. Fixed costs, such as marketing, administrative salaries, and other admin expenses, remain constant each month within Q4.

Expense type	Cost classification	Budgeted amount	Total Q4 cost	Variable cost per unit
Sales commissions	Variable	$5 per unit	$25,000	$5
Shipping expenses	Variable	$3 per unit	$15,000	$3
Marketing expense	Fixed	$6,000	$18,000	-
Administrative salaries	Fixed	$8,000	$24,000	-
Office supplies	Variable	$1 per unit	$5,000	$1
Other admin expenses	Fixed	$2,000	$6,000	-

Calculating the total variable S&A cost per unit

The variable costs that we include in the contribution margin analysis is increased by the amount of variable S&A costs. For the example of GreenLine Furnitures we have the following:

This total variable S&A cost per unit also matters for pricing decisions: unless a unit’s selling price covers both its variable production cost and this $9 of variable S&A cost, selling that unit reduces profit rather than adding to it.

Revised per unit CM

The original contribution margin of $156.50 per unit is the figure computed in the contribution margin analysis section, from the selling price per unit less variable production costs per unit. That figure is now reduced further by the amount of variable S&A costs. For the example of GreenLine Furnitures we have the following:

Total CM for Q4

The total contribution margin is recomputed following the additional data on the variable S&A costs. For the example of GreenLine Furnitures we have the following:

This adjusted total contribution margin of $737,500 reflects GreenLine’s profitability after accounting for all variable expenses related to production and sales. The adjusted contribution margin serves as a more realistic measure of profitability for Q4 after including variable S&A expenses.