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 expensesBusiness ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses.read more. 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 costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more, i.e., the administrative cost does not change with respect to change in the level of production in nature, or they may be semi-variable costSemi-variable CostFixed and variable costs combine to form semi-variable costs. Because semi variable costs are influenced by both fixed and variable costs, they are also referred to as mixed costs.read more, 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.
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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 incurredThe Nature Of The Cost IncurredIncurred Cost refers to an expense that a Company needs to pay in exchange for the usage of a service, product, or asset. This might include direct, indirect, production, operating, & distribution charges incurred for business operations. read more. 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 costDirect CostDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more, selling cost, administrative expenses, factory costFactory CostFactory costs are the expenses incurred in the normal course of business to manufacture goods that are intended to be sold to customers, and they include all costs associated with production, such as direct material costs, direct labour costs, and other manufacturing overheads.read more, etc. Administrative cost also forms part of the cost of production, and therefore, in calculating cost per unitCalculating Cost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services.read more of production, administrative costs are also considered.
Administrative vs. Selling Expenses
As we had discussed earlier, an organization incurs various indirect costs,Indirect Costs,Indirect cost is the cost that cannot be directly attributed to the production. These are the necessary expenditures and can be fixed or variable in nature like the office expenses, administration, sales promotion expense, etc.read more 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 costs 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 specific level of production.
It forms part of the cost of production, but selling expensesSelling ExpensesThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read more 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 the 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. E.g., the cost of information technology, Finance & Accounts, Human resources division, etc.
Depending on the nature of cost incurred, the administrative cost may be independent of the production quantity level, or it may vary with respect to change in a specific range of production levels. It is vital 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 enormous potential for reducing costs in every organization.
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