What are Administrative Expenses?
Administration expenses are the costs of paying wages and salaries and providing benefits to non-sales personnel. They are one of three kinds of expense that make up a company’s operating expenses.
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.
example of administrative expenses
For example, if XYZ Company spends $4,000 monthly on electricity and records this as an administrative expense, it might allocate the cost according to the square footage each individual department occupies. Assume:
- The production facility is 2,000 square feet
- The manufacturing facility is 1,500 square feet
- The accounting office is 750 square feet
- The sales office is 750 square feet
The company occupies 5,000 square feet. The electric bill could be allocated as follows:
- Production: $1,600 or (2,000 / 5,000) x $4,000
- Manufacturing: $1,200 or (1,500 / 5,000) x $4,000
- Accounting: $600 or (750 / 5,000) x $4,000
- Sales: $600 or (750 / 5,000) x $4,000
administrative expenses direct or indirect
From an accounting perspective, administrative expenses are considered an indirect expense because they are not directly related to the manufacturing of a product, such as an engineer or assembly line worker.
Other Types of Administrative Expenses
Wages and benefits to certain employees, such as accounting and IT staff, are considered administrative expenses. All executive compensation and benefits are considered an administrative expense. Building leases, insurance, subscriptions, utilities, and office supplies may be classified as a general expense or administrative expense.
Depending on the asset being depreciated, depreciation expenses may be classified as a general, administrative, or selling (marketing) expense. Organizations may choose to include consulting and legal fees as an administrative expense as well. However, research and development (R&D) costs are not considered administrative expenses.
To get the full picture of the costs associated with running certain business units, a company may allocate out administrative expenses to each of its departments based on a percentage of revenue, expenses, square footage, or other measures. Internally, this allows management to make decisions about expanding or reducing individual business units.