Aside from its sophisticated manufacturing facility, Tesla has also an intricacy in its organization, which will distinguish its non-manufacturing costs. Its persistence to use direct distribution channels to its customers will differentiate its cost structure compared to other auto companies. This article will examine the selling, general, and administrative costs for Tesla.
For Tesla’s manufacturing costs, read here.
Selling, General, and Administrative Costs
Selling costs are the costs incurred to obtain customer orders and provide customers with the finished product (Heisinger, & Hoyle, n.d.). These costs are also called order-getting and order-filling costs (Garrison et al., 2017). Some accounts of selling costs may come from advertising activities, shipping and delivery, sales commissions, sales salaries, and costs of warehouses for finished goods.
Selling costs can be classified into either direct or indirect costs (Garrison et al., 2017). For instance, the cost incurred by an advertising campaign of one specific product is a direct cost of that product, while the salary of a marketing manager who is responsible for many products is an indirect cost for each individual product.
General and administrative costs are the costs associated with the overall management of an organization rather than with manufacturing or selling (Heisinger & Hoyle, n.d.). General and administrative costs may be incurred for public relations activities, executive compensation, general accounting, secretarial, and similar costs related to the general administration of the organization.
General and administrative costs can also be categorized into either direct or indirect costs (Garrison et al., 2017). For example, the salary of an accounting manager in charge of accounts receivable collections in an area is a direct cost of that area, whereas the salary of a chief financial officer who oversees all of a company’s regions is an indirect cost with respect to individual regions.
Selling, General, and Administrative Costs for Tesla
After examining Tesla’s manufacturing costs in the last example, the non-manufacturing costs can be observed better. Based on the definition above, the selling costs for Tesla would be the costs incurred to secure customer orders and get the finished electric vehicles to the customer. The costs may include advertising, shipping, sales travel, sales commissions, sales salaries, and warehouse costs.
General and administrative costs for Tesla are the costs related to the general management of Tesla as an organization. The costs may include public relations, executive compensation, general accounting, and secretarial costs.
The uniqueness of Tesla is that the company does not franchise its sales, service, and delivery centers as dealerships, unlike other auto manufacturers (Vitu & Chacón, 2021). Tesla is pushing a direct-to-consumer distribution model that bypasses traditional franchised dealer networks by selling electric vehicles online and operating company-owned showrooms (Crane, 2014). While this may be prohibited by state or country law, Tesla continues to sell electric vehicles directly to customers.
The direct-to-customer distribution model will incur higher selling, general, and administrative costs for Tesla, but the company can gain the margin that is usually secured by the dealership operator. In other words, Tesla can set a much higher margin than other auto companies which rely on dealership channels. It allows the company to obtain higher profits. However, the company has to compensate for this by having a bigger organization, which will also contribute to higher SG&A costs.
Another cost that Tesla should consider is legal costs since dealership operators are lobbying policymakers to protect their line of industry and fighting Tesla to stop the disruption it brings. The company should thoughtfully analyze if the distribution model is worth fighting for.
The benefit of Understanding SG&A
In absorption costing, such as Job-Order Costing or Process Costing, SG&A is categorized as period cost, rather than product cost (Garrison et al., 2017). So SG&A costs are not assigned to products. However, in Activity Based Costing (ABC), some accounts of SG&A costs can be seen as related to a specific product. Hence ABC includes manufacturing and non-manufacturing costs, such as SG&A, in calculating the entire cost of a product, instead of only calculating the manufacturing cost of the product.
Understanding this concept will be really helpful for entrepreneurs and managers. Assigning the SG&A as a period or product cost can result in different information gathered. ABC can assign the costs accurately to the product based on the activities requirement, so it can provide more accurate cost data as a base for pricing. However, the implementation of ABC may incur higher costs.
Most companies that implement ABC use sophisticated information systems, such as an enterprise resource planning (ERP) system (Whitecotton et al., 2019). I worked at one of the largest fast-moving consumer goods once, and the company has already implemented an integrated SAP ERP to assist all of its activities. The experience really helped me in understanding better how and why it was implemented in terms of a more convenient cost accounting.
References Crane, D. A. (2014). Tesla and the Car Dealers’ Lobby. Regulation, 37(2), 10–14. https://repository.law.umich.edu/cgi/viewcontent.cgi?article=2319&context=articles Garrison, R., Noreen, E., & Brewer, P. (2017). Managerial Accounting (16th ed.). McGraw-Hill Education. Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html Vitu, T., & Chacón, D. (2021, September 10). Tesla opens sales, service, delivery center at Nambe Falls Travel Center. Santa Fe New Mexican. https://www.santafenewmexican.com/news/local_news/tesla-opens-sales-service-delivery-center-at-nambe-falls-travel-center/article_de4716b2-1199-11ec-aafb-b3f8f913df09.html Whitecotton, S., Libby, R., & Phillips, F. (2019). Managerial Accounting (4th ed.). McGraw-Hill Education.