Selling and administrative expense budget

Learning outcome statements

The learning outcome statements relevant for this section are:

identify the components of a selling and administrative expense budget
explain how specific components of the selling and administrative expense budget may affect the contribution margin

The selling and administrative (S&A) expense budget forecasts all non-production-related expenses that are expected to be incurred during the budget period. These expenses encompass all costs associated with marketing, distribution, and general administration, which are essential to support sales and operational activities. A thorough understanding of these components helps determine their impact on overall profitability, particularly the contribution margin.

Operating budget - sales and admin expenses budget component

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, usually a percentage of sales revenue or a per-unit amount; variable with sales.
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 refines the contribution margin analysis: deducting the variable S&A costs tied to sales activities, alongside variable production costs, gives a more accurate per-unit contribution margin and supports more precise performance targets and profit planning.

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 ($ per unit or per month) 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 -

Total variable S&A - - $45,000 $9

Total fixed S&A - - $48,000 -

Total Q4 S&A budget - - $93,000 $9

Common pitfall: only the variable S&A costs get folded into the contribution margin per unit. Fixed S&A costs - here, the $6,000 marketing, $8,000 administrative salaries, and $2,000 other admin expenses per month - are never spread across units. They’re subtracted later, in total, from the total contribution margin to arrive at operating income, not deducted from the per-unit CM. S&A costs, variable or fixed, are period costs: they’re expensed when incurred, never included in inventory or COGS, so variable S&A lowers the contribution margin but not the gross margin.

Calculating the revised contribution margin

Add up the variable S&A costs per unit: $5 (sales commissions) + $3 (shipping) + $1 (office supplies) = $9 total variable S&A cost per unit. Unless a unit’s selling price covers both its variable production cost and this $9, selling that unit reduces profit rather than adding to it.

Subtract this from the original contribution margin per unit - $156.50, computed in the contribution margin analysis section from the selling price per unit less variable production costs per unit - to get the revised contribution margin: $156.50 - $9 = $147.50.

Multiply by the 5,000 budgeted units for Q4 to get the revised total contribution margin: $147.50 × 5,000 = $737,500.

This $737,500 reflects GreenLine’s profitability after all variable production and selling costs. Subtracting the $48,000 of fixed S&A costs ($18,000 marketing + $24,000 administrative salaries + $6,000 other admin expenses) leaves $689,500 as the contribution toward fixed manufacturing overhead and operating income: $737,500 - $48,000 = $689,500.