Operating expenses and selling, general, and administrative expenses (SG&A) are both types of costs involved in running a company, and significant in determining its financial well-being. While generally synonymous, they each can be listed separately on the corporate income statement. Let's discuss the main differences between the two types of expenses.
Operating expenses, or OPEX for short, are the costs involved in running the day-to-day operations of a company; they typically make up the majority of a company's expenses.
OPEX are not included in cost of goods sold (COGS) but consist of the direct costs involved in the production of a company's goods and services. COGS includes direct labor, direct materials or raw materials, and overhead costs for the production facility. Cost of goods sold is typically listed as a separate line item on the income statement.
Operating expenses are the remaining costs that are not included in COGS. Operating expenses can include:
- Property taxes
- Business travel
A company's management will try to grow revenue while simultaneously keeping operating expenses under control.
Selling, General, and Administrative Expenses
SG&A expense includes all non-production costs.
Selling, general, and administrative expenses also consist of a company's operating expenses that are not included in the direct costs of production or cost of goods sold. In other words, SG&A includes all non-production costs. While this is typically synonymous with operating expenses, many times companies list SG&A as a separate line item on the income statement below cost of goods sold, under expenses.
SG&A may be listed as a single line item or broken out into several line items.
If SG&A expenses are broken out, they may include:
- Accounting expenses
- Legal expenses
- Corporate office overhead expenses such as salaries of administrative staff and corporate officers
- Advertising and promotional materials
- Marketing and sales expenses
- Rent, utilities, and supplies that are not part of manufacturing
SG&A expenses are typically the costs associated with a company's overall overhead since they can not be directly traced to the production of a product or service. SG&A includes nearly everything that isn't included in cost of goods sold. Interest expense is one of the notable expenses not in SG&A and is listed as a separate line item on the income statement. Also, research and development costs are not included in SG&A.
Administrative Expenses, Operating Expense, and SG&A
The decision to list SG&A and operating expenses separately on the income statement is up to the company's management. Some companies may prefer more discretion when reporting employee salaries, pensions, insurance, and marketing costs. As a result, an aggregate total of all non-production expenses is compiled and reported as a single line item titled SG&A.
However, some companies may report selling expenses as a separate line item, in which case the SG&A is changed to G&A. Like operating expenses, administrative expenses are incurred regardless of the number of sales being generated by the company. General costs such as office supplies, telephone bills, and postage are considered to be administrative expenses. Compensation for employees who provide overall support for the company that is not tied to a specific department is also considered an administrative expense.
In other words, administrative expenses are a subset of operating expenses and can be listed as G&A to separate selling expenses from the general administrative costs of running the company. Of course, if a company includes its selling costs in administrative expenses, it'll be listed under SG&A on the income statement. It all depends on how the company wants to break out their operating expenses.
The Bottom Line
Typically, the operating expenses and SG&A of a company represent the same costs – those independent of and not included in cost of goods sold. But sometimes, SG&A is listed as a subcategory of operating expenses on the income statement.
In times of financial difficulty, operating expenses can become an important focus of management when implementing cost controls. Operating expenses include costs that are incurred even when no sales are generated, such as advertising costs, rent, interest payments on debt, and administrative salaries. But typically, selling, general, and administrative expenses represent the same costs as operating expenses.