Selling Expenses

Selling expenses are the operating costs a business incurs to promote its products or services, win orders and get goods to customers. They include salaries, bonuses and commissions of sales staff, advertising and promotion, sales office and showroom costs, travel and entertainment for sales staff, and the cost of delivering goods to customers. Together with general and administrative expenses, they make up the main group of operating expenses that most companies report as selling, general and administrative expenses.

Selling expenses are period costs: they are charged to expense in the period they are incurred and are never included in the cost of inventory. This separates them from product costs, such as materials and factory labor, which become part of cost of goods sold when the goods are sold.

• Sales compensation: salaries of sales staff and sales managers, and commissions expense.
• Marketing: advertising expense, digital marketing, trade shows, samples, catalogs and sponsorships.
• Distribution: freight-out or delivery expense for shipping goods to customers, and the cost of delivery vehicles and their depreciation.
• Sales premises: rent, utilities and depreciation for stores, showrooms and sales offices.
• Other: sales travel, customer entertainment, credit card processing fees in some businesses, and warranty costs where they are treated as part of selling.

Shipping costs to bring goods in from suppliers, known as freight-in, are not selling expenses; they are part of the cost of inventory. Costs that serve the whole organization, such as the finance department and head office, are administrative rather than selling.

On a multiple-step income statement, selling expenses appear after gross profit within operating expenses, either on their own line or combined with administrative expenses. Subtracting them and the other operating expenses from gross profit gives operating income.

Consider a kitchenware company with net sales of $8,000,000 and gross profit of $3,200,000. Its selling expenses are: sales salaries and commissions $720,000, advertising $380,000, freight-out $210,000, showroom rent $150,000 and sales travel $40,000, a total of $1,500,000. Administrative expenses are $900,000. Operating income is $3,200,000 minus $2,400,000, or $800,000.

A common measure is selling expenses as a percentage of sales:

Here $\text{Selling expenses}$ is the total for the period and $\text{Net sales}$ is revenue after returns, allowances and discounts. For the kitchenware company, the ratio is $1,500,000 divided by $8,000,000, or 18.75 percent. If next year sales rise 10 percent but selling expenses rise 25 percent, the ratio climbs to about 21.3 percent, suggesting the extra sales were bought with heavy promotion or that sales costs are growing out of control.

Selling expenses include both fixed costs, such as showroom rent and base salaries, and variable costs, such as commissions and freight-out, which rise with sales. Separating the two is useful for cost-volume-profit analysis and budgeting. Businesses also compare selling costs with customer acquisition cost and customer lifetime value to judge whether marketing spending pays off.

Under US GAAP, advertising costs are generally expensed as incurred or the first time the advertising runs. Under ASC 340-40, incremental costs of obtaining a contract, such as a commission paid to win a multi-year contract, are capitalized and amortized if expected to be recovered, although a practical expedient lets companies expense them when the amortization period would be one year or less. This can move part of selling expense off the current income statement for subscription and software businesses.