What are Administrative Expenses
Administrative expenses are the expenses that an organization incurs not directly tied to a specific function such as manufacturing, production or sales. These expenses are related to the organization as a whole as opposed to an individual department. Salaries of senior executives and costs of general services such as accounting are examples of administrative expenses.
BREAKING DOWN Administrative Expenses
Administrative expenses are non-technical charges necessary for the basic operation of an entity. These expenses are vital to a company’s success as they occur to increase the efficiency of an organization. Centralized organizations typically have higher administrative expenses than decentralized organizations.
Nature of Administrative Expenses
Administrative expenses are typically fixed in nature as they incurred to be the foundation of business operations. These expenses would exist regardless of the level of sales that occur. Therefore, not many administrative expenses are variable. Because they are fixed, they are often hard to reduce.
Administrative expenses are frequently aggregated with general expenses. These two classifications of expenses make up the non-operating expenses of a business. This main group of expenses is often compared to the operating expenses which include the cost of goods sold. Administrative expenses are listed on the income statement below cost of goods sold and may be shown as an aggregate with other expenses such as general or selling expenses.
Examples of Administrative Expenses
Wages and benefits to certain employees, such as the accounting department, are considered administrative expenses. All executive compensation is considered an administrative expense as well. Building rent, insurance, subscriptions, utilities, and office supplies may be classified as either a general expense or an administrative expense. Depending on the asset being depreciated, depreciation expense may be classified as a general, administrative or selling expense. Organizations may choose to include consulting fees and legal fees as an administrative expense as well. Research and development are not considered administrative expenses.
Cost Reduction Incentive
Because administrative expenses may be eliminated without having to sacrifice any quantity of product being sold or produced, they are typically the first expenses looked into for budget cuts. There is strong motivation from management to maintain low administrative expenses relative to other expenses as an organization may utilize leverage more effectively with lower administrative costs. An entity may utilize the sales-to-administrative ratio to gauge the portion of sales revenue attributable to covering administrative costs.
Administrative expenses that are reasonable, ordinary and necessary for business operations may be deducted on a company’s corporate income tax return. These expenses must be deducted in the year they were used and must have been used during the course of business.