Variable selling and administrative costs are critical components in both variable and absorption accounting calculations. Variable costs such as commissions, bonuses and utility bills vary based on product production and sales for the period, whereas fixed costs do not tend to fluctuate. Variable selling and administrative costs also must be distinguished from variable manufacturing costs, which often have similar account names.
Using Variable Selling and Administrative Costs
Variable selling and administrative expenses are used in both absorption costing and variable costing. With absorption costing, the company subtracts both fixed and variable selling and administrative costs from gross profit to calculate operating profits. This is the income statement presentation required by generally accepted accounting principles. Alternatively, some companies use variable costing for internal-use financial statements. In variable costing, variable selling and administrative costs, along with variable manufacturing costs, are deducted from sales revenue to calculate the company contribution margin.
Identify Selling and Administrative Expenses
The first step in the calculation is identifying total selling and administrative expenses. These are operating expenses that a business incurs outside of product manufacturing. The most common selling and administrative costs include salaries paid to executives, sales personnel, administrators, accounting staff and human resources staff. Selling and administrative costs also include:
- office rent
- computer equipment
- marketing materials
- office supplies
- property taxes
Costs that aren't part of core business activities, like investment and financing expenses, aren't included in selling and administrative costs.
Distinguish Variable from Fixed Costs
Of the total selling and administrative costs, identify which are fixed and which are variable. Fixed costs such as office rent, property taxes, computer equipment and base salaries tend to be the same no matter how much the company produces. Variable selling and administrative costs, on the other hand, fluctuate based on sales and production. These include sales commissions, office supplies, utilities and shipping expenses.
Exclude Variable Manufacturing Overhead Costs
Exclude any variable manufacturing overhead costs accidentally included in variable selling and administrative costs. Many of the costs in the variable overhead account sound similar. For example, variable manufacturing overhead also includes utilities, supplies and certain types of commissions. The difference lies in where the costs are incurred. The utility bill for the manufacturing plant is a variable manufacturing cost, whereas the utility bills for the corporate headquarters and sales locations are variable selling and administrative costs. Similarly, supplies purchased to service manufacturing machines, as well as production commissions paid to manufacturing plant managers and employees, are manufacturing costs.