GH Kordestani; S-M Mortazavi
Volume 9, Issue 34 , July 2012, , Pages 77-102
Abstract
An increase in the ratio of sales, general and administrative costs to sales (SG&A ratio) is associated with contradictory interpretations, namely a negative one due to deficient cost control and a positive one derived primarily from investments for improvement of operational processes. Based on ...
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An increase in the ratio of sales, general and administrative costs to sales (SG&A ratio) is associated with contradictory interpretations, namely a negative one due to deficient cost control and a positive one derived primarily from investments for improvement of operational processes. Based on these conflicting explanations, it is crucial to distinguish between whether an increase in the ratio of SG&A costs to sales is actually intended by management in order to enhance future profitability or it is because of deficient cost control. These explanations were investigated in this research. So the impact of cost efficiency on the relation between SG&A ratio and future performance is examined among 150 firms during 1380 to 1389. Findings show that intended increases significantly enhance future operating income and future sales, but non-intended increases in this ratio, decreases future operating income. Moreover, increases in SG&A ratio, cause decreases in future SG&A expenses in both efficient and inefficient firms, but dosen’t have a significant impact on future cost of goods sold (COGS). To study in more details, the SG&A efficiency and COGS efficiency were used in model at the same time and findings show that the impact of SG&A ratio on future operating income is significantly positive only if SG&A efficiency exists and also there is ample latitude for reduction of COGS. Because only in this way, SG&A costs represent investments in improving manufacturing efficiency.
