While a variety of distortions are possible, there are, as we shall see, several ways of correcting for them. Profits can be inflated and losses understated using broadbrush SG&A accounting methods. Under the cost-of-sales method, the controller charges each product line an SG&A amount based on its share of manufacturing cost (materials, direct labor, and factory overhead).Īlthough the use of such standardized, across-the-board methods simplifies SG&A cost accounting for company accountants working under the pressure of having to meet financial reporting deadlines, these arbitrary measures can distort the profitability of a company’s different product lines and market segments. If, for example, the company’s SG&A cost is 10 % of its sales revenue, then that’s the percentage the company controller will charge to each product line based on its sales. When percent of sales, one of the most common methods, is used, the corporate controller simply divides the total corporate sales revenue into the total companywide SG&A expense and applies the resulting percentage to all product lines. In organizations that take a production-line approach to SG&A, the controller typically uses the percent-of-sales, cost-of-sales, or some other arbitrary method of allocation. It can be found in every industry and in companies that are well managed in other respects. I have observed this process many times in the course of my work as a manufacturing cost consultant. Many manufacturing companies, however, continue to make the mistake of relying on “one size fits all” methods of allocating SG&A costs. To achieve better control over nonmanufacturing costs, manufacturing executives are developing more precise measures of their SG&A expenses. ![]() ![]() In the high-technology sector, SG&A can easily approach 100 % of manufacturing expenses. Today, because of higher selling, advertising, warehousing, and other costs, it’s not unusual for SG&A to approach 50 % or more of a company’s manufacturing costs. Over the past ten years, selling, general, and administrative (SG&A) expenses have been rising as a percentage of the total cost of doing business. manufacturing companies are giving their nonmanufacturing costs much closer scrutiny than they’ve traditionally done and with good reason.
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