Administrative Expenses

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 costs necessary for administering business to ensure the smooth running of business operations. For Example, the Cost of Information technology, Finance & Accounts, Human resources division, etc.

Administrative expenses budgets are crucial for a business as they cover essential operational costs such as salaries, office rent, utilities, and office supplies. These expenses enable the smooth functioning of the organization by supporting day-to-day operations and facilitating strategic decision-making. Effective management of this is vital to maintain financial stability and allocate resources efficiently.

Administrative expenses refer to the spendings of an organizations that are directly related to their primary source of income. It is unimaginable to ensure the survival of an entity without business expenses. Every organization running a trading business, providing services, or manufacturing any product, incurs administrative 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 clothes has its manufacturing unit. Still, along with its manufacturing unit, it also has to invest in acquiring office shops to maintain its accounts, ensure sales of goods, monitor various business departments, etc.

General services of office building maintenance, rent, etc. are some examples. Administrative expenses in themselves are either fixed costs, i.e., the administrative cost does not change concerning 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 always wants to lower admin costs to the lowest possible level.

In the realm of finance, understanding the formula for administrative expenses accounting is essential. It involves adding up all the costs associated with running the administrative functions of a business. This typically includes employee salaries, office space rent, utilities, office supplies, insurance, and other overhead costs. The formula is:

Administrative Expenses = Salaries + Rent + Utilities + Office Supplies + Insurance + Other Overhead Costs

Based on the availability of data, one can calculate administrative expenses. One also has to check the nature of the cost incurred. Suppose the cost incurred is directly related to the manufacturing of products and varies with production level. In that case, it may not be right to classify that cost as administrative, but it should be classified as a direct operating cost. Different accounting ERPs 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. Therefore, in calculating cost per unit of production, administrative costs are also considered.

Now that we understand the basics, formula, and related concepts of an administrative expenses budget, let us apply the theoretical knowledge to practical application through the examples below.

Example #1

Tech Innovate Inc. is a tech solution provider for medium and large-scale manufacturing units in the Middle East. Its administrative expenses include various operational costs, including salaries, rent, utilities, office supplies, and insurance.

For the month of January 2023, Tech Innovate Inc. incurs the following administrative expenses:

• Employee Salaries: $20,000
• Rent for Office Space: $5,000
• Utilities (Electricity, Water, Internet): $3,000
• Office Supplies: $1,500
• Insurance Premiums: $2,000

To calculate their total administrative expenses for the month, we must add up these costs:

Administrative Expenses = $20,000 + $5,000 + $3,000 + $1,500 + $2,000 = $31,500

Therefore, Tech Innovate Inc. spent $31,500 on administrative expenses for January 2023.

Example #2

People’s Majlis, the unicameral legislative body in Maldives, discussed their budget for 2024 in their parliament session in October 2023.

The session disclosed that 93 members would be elected in the following year. It was also informed that MVR 187 million would be allocated towards administrative expenses to run the parliament. The budget is significantly higher than the budget of the concluding year as there are multiple constituencies that would have newly elected members who need to work afresh in their respective elected areas.

Let us understand the list of items that are considered for administrative expense accounting through the points below.

• Salaries and wages cost employees engaged in finance, accounts, human resources, information technology division, etc.
• Office maintenance cost.
• General Repairs and maintenance costs.
• Finance and insurance cost.
• Insurance Costs
• IT Services Cost
• Building Rent and Maintenance Costs

As we had discussed earlier, an organization incurs various indirect costs, which are not always directly proportional to production quantity. Still, all such expenses cannot be classified as administrative expenses. For example, the organization incurs commission costs on selling its product. This cost is a 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. In contrast, they are independent, i.e., either not dependent on the quantity of production level or it is dependent on the specific level of production.

It forms part of the cost of production, but selling expenses do not form part of production cost. An example of administrative expense includes finance and insurance, whereas selling commission forms part of selling expenses. Not all salaries form part of administrative expenses. Still, they may include selling overheads like the employment cost of the person engaged solely for selling products, which will form part of selling expenses.