Selling and Administrative Expenses

Definition

Selling and administrative expenses are the costs associated with the overall operations and management of a business, excluding the direct costs of manufacturing or producing a product. These expenses include costs related to sales, marketing, and general administration that are necessary for the business to function effectively, but are not directly tied to the production process.

5 Must Know Facts For Your Next Test

1. Selling and administrative expenses are considered period costs, meaning they are expensed in the period in which they are incurred rather than being included in the cost of a product.
2. These expenses are typically fixed in nature, meaning they do not vary directly with the level of production or sales.
3. Examples of selling and administrative expenses include salaries and commissions for sales personnel, advertising and promotion costs, rent and utilities for office space, and administrative staff salaries.
4. In variable costing, selling and administrative expenses are treated as period costs and are not included in the cost of a product, whereas in absorption costing, they are considered part of the total cost of a product.
5. The treatment of selling and administrative expenses is a key difference between variable costing and absorption costing, as it affects the reported cost of a product and the resulting profit margins.

Review Questions

• Explain how the treatment of selling and administrative expenses differs between variable costing and absorption costing.
  • In variable costing, selling and administrative expenses are treated as period costs and are not included in the cost of a product. This means that these expenses are deducted from revenue in the period in which they are incurred, rather than being allocated to the cost of goods sold. In contrast, under absorption costing, selling and administrative expenses are considered part of the total cost of a product and are included in the cost of goods sold. This results in a higher reported cost of a product and lower profit margins compared to variable costing.
• Analyze the impact of including selling and administrative expenses in the cost of a product under absorption costing.
  • Including selling and administrative expenses in the cost of a product under absorption costing has several implications. First, it results in a higher reported cost of the product, which can affect pricing decisions and competitiveness in the market. Second, it can distort the true profitability of a product, as the fixed overhead costs are allocated to the product regardless of the level of production or sales. This can lead to suboptimal decision-making, such as continuing to produce or sell products that are not truly profitable. Additionally, the inclusion of these period costs in the product cost can make it more difficult to accurately track and control the expenses associated with the sales and administrative functions of the business.
• Evaluate the role of selling and administrative expenses in the comparison of variable costing and absorption costing, and discuss the implications for managerial decision-making.
  • The treatment of selling and administrative expenses is a key distinction between variable costing and absorption costing, and it has significant implications for managerial decision-making. Under variable costing, these expenses are recognized as period costs, which allows managers to focus on the variable costs directly associated with production and sales. This can provide more accurate information about the profitability of individual products or product lines, enabling better pricing decisions and resource allocation. In contrast, absorption costing includes selling and administrative expenses in the product cost, which can obscure the true profitability of a product and lead to suboptimal decisions, such as continuing to produce or sell products that are not truly profitable. Ultimately, the choice between variable costing and absorption costing should be based on the specific needs and goals of the organization, with a focus on providing managers with the most relevant and accurate information to support effective decision-making.

Related terms

Variable Costing: A costing method that includes only variable production costs in the cost of a product, excluding fixed manufacturing overhead costs.

Absorption Costing: A costing method that includes both variable and fixed manufacturing costs in the cost of a product, treating all manufacturing overhead as product costs.

Period Costs: Costs that are expensed in the period in which they are incurred, rather than being included in the cost of a product.