In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations and administer its business, but these costs are not directly attributable to the production of goods and services. Information on this type of expense is especially useful when calculating a company's fixed costs.
- General and administrative expenses are the necessary costs required to maintain a company's daily operations and administer its business
- General and administrative costs are not directly attributable to the production of goods and services.
- While there is a strong motivation for management to reduce these costs, because they are fixed costs, reducing general and administrative costs is a difficult thing to do.
General and Administrative Expenses
Typical items listed as general and administrative expenses include:
- Executives wages and benefits
- The depreciation on office fixtures and equipment
- Legal counsel and accounting staff salaries
- Office supplies
General and administrative expenses typically refer to expenses that are still incurred by a company, regardless of whether the company produces or sells anything. This type of expense is shown on the income statement, typically below cost of goods sold (COGS) and lumped with selling expenses, forming a selling, general and administrative expense line item.
Typically, any cost that does not link to the production or the selling process and is not part of research and development is classified as a general and administrative expense. As a result, general and administrative expenses do not fall under cost of goods sold and are not inventory. General and administrative expenses are also typically fixed costs in nature, as they would stay the same regardless of the level of sales that occur.
For instance, a public company must hire external auditors to audit its financial statements and footnotes on a regular basis. An audit fee is typically not associated with a production process, but this cost is still incurred regardless of whether a company produces anything or not.
Reducing General and Administrative Expenses
Not many general and administrative expenses are variable; therefore, reducing administrative expenses is a difficult proposition.
Because administrative expenses do not directly contribute to sales or production, there is a strong incentive for management to lower a company's general and administrative expenses. However, since these costs are typically fixed, there is a limited ability to reduce them.
Companies that have centralized management tend to have higher general and administrative expenses. Decentralizing and delegating certain functions to subsidiaries can significantly lower general oversight expenses.