What Is SAG in Accounting?

by Cam Merritt ; Updated July 27, 2017
Two business accountants working on spreadsheets.

In accounting, "SAG" stands for selling, administrative and general expenses. These are a company's non-production costs of doing business -- in other words, operating expenses not directly related to producing whatever it is the company sells. These expenses typically appear on a company's income statement, sometimes as individual items, other times as a single consolidated category.

Income Statement

The top line of a company's income statement shows its sales revenue. This is the money that the company takes in from its core business. If the company makes computer equipment, for example, this line will be its revenue from selling that equipment. The next line of the income statement is the "cost of goods sold." Under the rules of corporate accounting, only the direct costs of production count as cost of goods sold -- for example, raw materials, parts, fabrication, manufacturing labor and storage for finished products. Subtracting the cost of goods sold from sales revenue gives you the company's gross profit. Only then does the company subtract its selling, administrative and general expenses, with the resulting number the company's operating profit.

SG&A;

Most domestic businesses actually use the abbreviation "SG&A" to refer to selling, general and administrative expenses, though some use SAG. It's purely a matter of company preference; the terms refer to the same things. Selling costs, as the name suggests, are the expenses directly incurred in selling the company's products or services; these include such things as sales commissions, advertising, distribution and warranty costs. General and administrative costs include wages for non-production workers, general office expenses and all other overhead costs that can't be directly tied to production.

Price vs. Cost

It's important to note that while SG&A expenses are never included in "cost of goods sold" on the income statement, they are almost always included in the price of the finished product on the shelves. Accounting rules require that they be listed separately from production costs so that the investing public can get an accurate picture of a company's operations.

Significance

Many investors and analysts keep an eye on a company's SG&A-to-sales ratio: the percentage of sales revenue that gets eaten up by overhead costs. The lower the percentage, the more efficiently the company is running, though what constitutes a "good" percentage will vary by industry and by product. Some companies might have a high gross profit -- meaning their products sell for a great deal more than they cost to produce -- but require very high SG&A expenses. Imagine selling bottles of air for $100 apiece. Your gross profit -- price minus cost -- would appear to be extremely high, but you would have to spend so much money trying to persuade people to buy your bottled air that you'd lose money. On the other hand, some companies might have a low gross profit but require little in the way of SG&A expenses.

References

About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

Photo Credits

  • Vstock LLC/VStock/Getty Images