Operating Expenses vs. SG&A: What's the Difference?

Operating Expenses vs. SG&A: An Overview

Operating expenses and selling, general, and administrative expenses (SG&A) are two types of costs that companies incur. Both relate to the day-to-day costs of running a business that are not directly tied to the production of goods and services.

Common operating expenses include rent, utilities, insurance premiums, and property taxes, whereas typical SG&A expenses include legal expenses, accounting expenses, and advertising expenses. These expenditures can either be lumped together on a company's income statement as operating expenses or broken down, in which case the amount spent specifically on SG&A will be revealed separately.

Operating 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 is not included in the cost of goods sold (COGS), which consists 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. The 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:

• Rent
• Utilities
• Salaries/wages
• 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)

Selling, general, and administrative expenses (SG&A) also consist of a company's operating expenses that are not considered 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, often companies list SG&A as a separate line item on the income statement below the 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 the 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.

Special Considerations

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 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 its 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 the cost of goods sold. However, sometimes SG&A is listed as a subcategory of operating expenses on the income statement. These expenses are incurred even when no sales are generated and can become an important focus of management when implementing cost controls.