Selling and administrative expense budget
/What is the Selling and Administrative Expense Budget?
The selling and administrative expense budget is comprised of the budgets of all non-manufacturing departments, such as the sales, marketing, accounting, engineering, and facilities departments. In aggregate, this budget can rival the size of the production budget, and so is worthy of considerable attention. The budget is typically presented in either a monthly or quarterly format. It may also be split up into segments for a separate sales and marketing budget and a separate administration budget.
How to Derive the Selling and Administrative Expense Budget
The information in the selling and administrative expense budget is not directly derived from any other budgets. Instead, managers use the general level of corporate activity to determine the appropriate level of expenditure. This can involve activity-based costing analysis to determine which activities are likely to be needed more or less as sales levels and capital spending change. There may also be some impact of bottleneck operations on the amount of expenditures in this budget (especially if the bottleneck is in the sales department). When creating this budget, it is useful to determine the activity levels at which step costs may be incurred, and to incorporate them into the budget.
It is very common to derive the amounts in the sales and administrative expense budget with incremental budgeting, which means that the amounts budgeted are based on the most recent budget or the most recent actual results. This is not the best way to create budgets, since it tends to perpetuate existing spending patterns, and allows managers to retain excess funding. However, since it is a simple way to create a budget, it is the most common method for doing so, especially in companies that are not under significant competitive pressure to cut costs.
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Example of the Sales and Administrative Expense Budget
ABC Company has sales, marketing, accounting, and corporate employees, as well as related support functions. It creates the following budget for them:
ABC Company
Selling and Administrative Expense Budget
For the Year Ended December 31, 20XX
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| Advertising | $5,000 | $5,000 | $10,000 | $10,000 |
| Insurance | 2,000 |
2,000 | 2,000 | 2,000 |
| Payroll taxes | 1,500 | 1,600 | 1,700 | 1,800 |
| Rent | 8,000 |
8,000 |
8,000 |
8,000 |
| Salaries | 20,000 | 21,000 | 22,000 | 23,000 |
| Supplies | 1,500 | 1,500 | 1,500 | 1,500 |
| Travel and entertainment | 2,500 |
2,500 |
2,500 |
2,500 |
| Utilities | 3,000 | 3,000 | 3,000 | 3,000 |
| Other expenses | 1,500 | 1,500 | 1,500 | 1,500 |
| Total Expenses | $45,000 |
$46,100 |
$52,200 |
$53,300 |
The preceding example reveals a common characteristic of most line items in a sales and administrative expense budget, which is that the majority of costs are fixed in the short term, and so do not vary from quarter to quarter. In the example, there is a scheduled increase in the advertising expense in the third quarter, and there are budgeted pay increases in all periods - otherwise, there are no expectations for cost changes in the budget, and that is a realistic expectation for many companies.
Other Sales and Administrative Expense Budget Issues
It is not customary to include a cash requirements calculation as part of this budget. Instead, the cash requirements are calculated for all of the revenues and expenditures of a business as a whole, and are then summarized on a separate page of the budget.