Administrative Expenses Meaning
Administrative Expenses can be said as the cost incurred by a business organisation which are not directly related with manufacturing, production or sale of goods or services provided but are indirect cost which are necessary for administrating business so as to ensure the smooth running of business operations. For Example, Cost of Information technology, Finance & Accounts, Human resources division etc.
Explanation
Every organization either running a business of trading or providing services or manufacturing any product incurs administrative expenses. It is unimaginable to ensure the survival of an entity without business expenses. These are not directly related to the goods or services manufactured, traded, or sold but are indirectly related to the same. For example, an organization engaged in manufacturing of clothes having its manufacturing unit but along with its manufacturing unit, it also has to invest in acquiring offices, shops for maintaining its accounts, ensuring sale goods and monitoring various business departments, etc.
General services of office building maintenance, rent, etc. are some of the examples. Administrative expenses in itself are either fixed costs i.e. administrative cost does not change with respect to change in the level of production in nature or they may be semi-variable cost i.e. it may be fixed up to a certain level of production but may change once production reaches a certain level. Since administrative costs are not directly linked with production, management is always of view to lower admin costs to the lowest possible level.
List of Administrative Expenses
- Salaries and wages cost of employees engaged in finance, accounts, human resources, information technology division, etc.
- Office maintenance cost.
- General Repairs and maintenance cost.
- Finance and insurance cost.
- Insurance Costs
- IT Services Cost
- Building Rent and Maintenance Costs
How to Calculate Administrative Expenses?
Based on the availability of data, one can calculate administrative expenses. One also has to check the nature of the cost incurred. Like, if the cost incurred is directly related to the manufacturing of products and varies with production level then it may not be right to classify that cost as administrative but it should be classified as a direct operating cost. Different accounting ERPs do nowadays have internal bifurcation and classify cost as a direct cost, selling cost, administrative expenses, factory cost, etc. Administrative cost also forms part of the cost of production and therefore in calculating cost per unit of production, administrative costs are also considered.
Administrative vs Selling Expenses
As we had discussed earlier, an organization incurs various indirect cost which is not always directly proportional to production quantity but all such expenses cannot be classified as administrative expenses. For example, the organization incurs commission cost on selling its product, this cost is selling expense and not an administrative expense. Selling expenses are dependent on the number of goods sold i.e. selling expenses may be directly proportional to the number of goods sold by an organization whereas they are independent i.e. it either does not dependent on the quantity of production level or it is dependent up to the certain level of production.
It forms part of the cost of production but selling expenses does not form part of production cost. Example of administrative expense includes finance and insurance cost whereas selling commission forms part of selling expenses. Not all salaries cost forms part of administrative expenses but it may also include selling overheads like employment cost of the person engaged solely for selling products will form part of selling expenses.
Conclusion
Administrative Expenses can be said as the cost incurred by a business organization that is not directly related to manufacturing, production, or sale of goods or services provided but are indirect cost which is necessary for administrating business so as to ensure the smooth running of business operations. For example, the cost of information technology, Finance & Accounts, Human resources division, etc.
Depending on the nature of cost incurred, the administrative cost may either be independent of production quantity level or it may vary with respect to change in a certain range of production levels. It is important for an organization to identify and classify costs into various categories for the purpose of cost optimization, reducing cost, and increasing efficiency of production. The administrative cost is different from selling expenses. It has huge potential for reducing costs in every organization.
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