What are Administrative Expenses?

The administrative expenses are the expenses incurred by a company that are not directly linked to an elementary function such as manufacturing, production or sales. These expenses are related to the organization as a whole rather than an individual department. Salaries for top executives and costs for general services such as accounting are examples of administrative expenses.

The administrative expenses they are non-technical expenses necessary for the basic operation of a business. These expenses are vital to the success of the organization, as long as they are to increase the efficiency of an organization. Centralized organizations tend to have higher administrative costs than decentralized organizations.

Administrative expenses usually be fixed as they are engaged for the basis of business operations. These expenses will always exist, regardless of the level of sales. Therefore, not many administrative expenses are variable. Because they are fixed, they are often difficult to reduce.

Classification

Administrative expenses are usually classified within general expenses in the income statement. In turn, general expenses are non-operating expenses of a company (indirect). Administrative expenses are listed in the Statement of income below cost of goods sold and may be shown as an aggregate with other expenses such as selling or general expenses.

Examples of administrative expenses

Salaries and benefits for certain employees, such as the accounting department, are considered administrative expenses. All executive compensation is also considered an administrative expense. Leases, insurance, subscriptions, utilities, and office supplies can be classified as a general expense or an administrative expense. Depending on the asset being depreciated, the expense of depreciation It can be classified as a general, administrative or selling expense. Organizations can choose to include consulting fees and legal fees as an administrative expense as well. Research and development Are not consideredadministrative expenses.

Cost reduction incentive

Because administrative expenses can be eliminated without having to sacrifice products that are sold or produced, are typically the first expenses examined in the cuts budgetary. There is a strong motivation of management to keep administrative expenses low relative to others expenses, as an organization can use leverage more effectively with lower costs administrative. An entity may use the relationship between sales and management to calculate the part of sales revenue attributable to covering the administrative costs.