ADMINISTRATION EXPENSES: HOW TO CALCULATE THEM AND EXAMPLES - DUDAS - 2025

The administrative expenses are expenses incurred by an organization that are not related directly to a specific function, such as sales or production. These expenses are tied to the business as a whole, rather than to a particular department. General service expenses, such as accounting, and senior management salaries are examples of administrative expenses.

In accounting, administrative expenses represent the expenses that are necessary to run the business and maintain the daily operations of a company, although these expenses are not directly attributable to the manufacture of the products.

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Keeping track of these expenses can help you make financial forecasts, claim tax deductions, and determine when it's time to hire new employees.

Administrative expenses generally include expenses that offer a broad benefit to the business. The benefits of these expenses transcend departmental lines, making it possible for the different necessary functions to be carried out successfully.

What are administrative expenses?

Administrative expenses are charges that are needed for the essential functioning of an organization. These expenses are critical for a business to be successful as they are incurred to increase the effectiveness of the company.

Corporations that are centrally managed tend to have higher administrative expenses. Decentralizing and delegating certain functions to subsidiaries can significantly reduce administrative oversight expenses.

Administrative expenses are usually fixed by nature, affecting the basis of business operations. These expenses would exist independently of the level of sales produced. Therefore, since they are fixed costs, they are often difficult to reduce.

Administration fees are not included in the cost of merchandise sold and are not inventory. Nor are they part of research and development.

Classification

Administration expenses are often added to overhead. These two expense classifications make up the non-operating expenses of a business.

This main group of expenses is often compared to operating expenses, which include the cost of merchandise sold.

Administrative expenses are listed on the income statement, below the cost of merchandise sold.

Reduction incentive

Because administration costs can be eliminated without sacrificing any amount of product that is sold, they are generally the first expenses that are taken into account to make budget cuts.

There is great motivation on the part of management to keep administration costs low relative to other expenses. This is because a company can use leverage more safely if it has less administration overhead.

However, since these expenses are generally fixed, there is limited ability to reduce them.

How to calculate them?

Gather all the accounting records from the general ledger. The general ledger is the book where all financial transactions that occur in the business are recorded. All expenses are listed and reviewed to confirm that they are accurate.

Expenses are classified into three categories: the cost of the merchandise sold, which includes expenses related to the production of goods and services; financial and sales expenses, arising from investments; and expenses that comprise administrative expenses.

All administrative expenses are separated from the rest of the operating expenses. Some of the administrative expenses can be: payroll expenses, rental expenses, repairs, insurance expenses and office operations costs.

All the administrative expenses incurred in the business are added. Make sure to add up all the expenses that fall into this category. This will give the total amount of money the business spent on expenses related to the category of administration expenses.

Accounting for administration expenses

In financial statements, companies typically record administrative expenses in the accounting period in which the expense was incurred, not in the period during which it was paid.

Because many administration expenses are not purchases, but recurring payments, bank statements or payment receipts may need to be retained for tracking.

In income statements, the cost of merchandise sold is calculated near the top, and is subtracted from total sales as part of the gross profit calculation.

The other expenses listed below gross profit are selling and administrative expenses, excluding depreciation.

Selling and administrative expenses can be calculated by subtracting the net profit and depreciation of the business from the total gross profit.

A company can use the sales / administration expense metric to measure the portion of sales revenue that will be assigned to cover administration expenses.

Examples of administration expenses

The most common example of administrative expenses is utility expenses. Charges for heating, cooling, energy and water are classified as administration expenses. Internet, landline and mobile phone service expenses are also included in these expenses.

The expense of renting space for business operations is also a common example of administration expenses. For example, the rental expense for a set of offices in a building, or for a manufacturing plant.

In some cases, it could be successfully argued that the rental expense of the production facility should be allocated to the costs of producing the goods.

Insurance, subscriptions, depreciation expenses for equipment and space used in administration, utilities, and office supplies can be classified as administration expenses.

Salaries and fees

The salaries of general managers and administrators, who are involved in many different areas of operations. Directors 'compensation and senior managers' salaries may also be included.

Benefits and salaries for certain workers, such as those in the human resources, accounting, and information technology departments, are considered administrative expenses.

Businesses may also be inclined to include legal and consulting fees as an administration expense.

For example, a public company must regularly hire external auditors to audit its financial statements. An audit fee is generally not associated with a production process. However, this expense is still incurred, regardless of whether the company produces something or not.

References

1. Investopedia (2018). Administrative Expenses. Taken from: investopedia.com.
2. Andriy Blokhin (2018). What are general and administrative expenses? Taken from: investopedia.com.
3. Van Thompson (2018). What Are Administrative Expenses? Small Business - Chron. Taken from: smallbusiness.chron.com.
4. International Financial Reporting Tool (2018). Administrative Expenses. Taken from: readyratios.com.
5. Paul Merchant (2017). How to Calculate General and Administrative Expenses. Bizfluent. Taken from: bizfluent.com.