incurred expenses that are not related to a certain segment of a company’s operation but the organization as a whole.
Administration Cost Details
There are bound to be costs/expenses involved in running a company. Some of these expenses relate to specific functions, e.g., the costs of running manufacturing equipment, marketing costs, production costs, and more. On the other hand, another type of costs is more general/universal but still necessary in running a company, e.g., the salaries of higher executives and accounting costs. These general expenses are administration costs, also often known as general and administrative expenses.
The main functions of administration cost are to perform the basic & essential activities of a company and to adhere to the rules and laws set by regulators. Administration costs can also increase the overall efficiency of running a firm. Most administration costs are fixed costs, which means their amount tends to be stagnant no matter how the business is doing or if the company produces a small or large number of goods or services; hence they are ‘fixed.’ With that said, administration costs can also be semi-variable, meaning these expenses have a fixed, minimum value but the amount can increase depending on the situation.
Accountants often list administration costs on the income statement under operating expenses as general and administrative expenses. It may also appear simply as administration expenses or general expenses. In some cases, administration costs may also be combined with sales expenses and listed as overhead costs, arguably making the income statement more readable. However, keep in mind that sales expenses and administration expenses are still referring to two different things.
Example of Administration Cost
In terms of salaries, wages, benefits, and compensations, administration costs encompass those given to higher executives, accounting staff, and IT staff. The wages of other employees who work for specific segments of the whole firm are not part of administrative expenses. Administration costs also include insurance premiums, administrative supplies, rents, legal fees, and other similar costs. These costs consist only of expenses that are not explicitly related to certain aspects of the company.
Administration costs can also be in the form of depreciation, as long as the assets related to it have general quality. One example is the depreciation of an administration building. It doesn’t include the depreciation of other types of assets like equipment and vehicles used to transport goods. Furthermore, other expenses coming from seemingly general activities, like R&D, are not an administration cost as they have a specific, non-general purpose to the company.
Significance of Administration Cost
Administration costs are indeed important for a company to run correctly, if not at all. They don’t relate directly to how a company is making money, unlike other expenses such as manufacturing expenses and marketing expenses. Additionally, some businesses tend to overspend regarding administration costs, defeating its purpose of making the company runs efficiently. Thus, when a budget cut happens, they are typically at the top of the list of targets.
A good company tries to keep its administrative budget relatively low compared to other costs. It is also prudent for firms to use one of the various indicators such as sales-to-administrative expense ratio to see if they can properly allocate budget distribution. Sales-to-administrative indicates the amount of revenue from sales used for general & administrative expenses. Comparing the ratio with other companies from the same industry is also viable.
Administration Cost vs. Overhead Cost
Some sources may tell you that administration costs and overhead costs are the same. This is because both administration costs and overhead costs refer to expenses not related to creating a good or service. However, there is a small difference between the two. Overhead costs also include expenses generated from sales and marketing efforts, which is not the case for administration costs.
Overhead costs comprise general and administrative expenses as well as selling expenses. Overhead costs are also known as selling, general, and administrative expenses (SG&A). To put it simply, all administration costs are overhead, but not all overhead expenses are administrative—some of them in the form of selling expenses.
Fixed costs may also receive the same treatment. Some people may even treat administrative expenses or overheads as fixed costs. Keep in mind that fixed costs refer to expenses whose value won’t vary, regardless of which activities businesses incur these expenses from. It’s true that administration costs, overhead costs, and fixed costs mostly overlap, e.g., building leases and subscriptions. However, some expenses can be administrative but don’t have a fixed value, e.g., the cost of running electricity whose value has a minimum limit but will be larger if production activity increases.