Administrative Expenses – Types and Example

What Are Administrative Expenses?

An administrative expense is any expense that directly impacts a business’s operations and maintenance, whether incurred during the accounting period or after a change in accounting principles. Administrative costs vary based on the size and scope of an organization.

These costs can sometimes be minimized or eliminated by hiring outside professionals for certain tasks, but this goes beyond routine contract management duties.

Understanding Administrative Expenses

Administrative expenses are minor and don’t affect the core business of a company. They can include employees in senior management, the costs associated with running an office, or other general services.

It is important to remember that administrative expenses may include legally required payments, including accounting, legal, insurance, and pension costs.

Administrative expenses are a direct consequence of doing business. Sometimes referred to as “indirect” expenses, administrative expenses include products such as postage or stationary, equipment rentals, and the cost of keeping your lights on. The goal is to reduce this expense as much as possible. Administrative expenses can be viewed below COGS on the income statement. They are typically combined with general or selling expenses.

The most important thing to know about administrative expenses is that they are fixed. This means there may not be a direct relationship between the number of administrative expenses incurred and the level of sales that occur. Organizational expenses are variable.

They may include payroll, office supplies, computer hardware/software, internet costs, vehicle maintenance and repairs, energy/utility expenses, inventories, real estate management fees, and more. Once you understand your expenses’ basics and the categories within those expenses that you fit into, then budgeting becomes much easier. 

Management is strongly motivated to maintain low administrative expenses relative to other costs, allowing a business to utilize leverage more effectively. Managing administrative expenses gives business owners a way to save time without sacrificing profitability.

By making this conscious effort in tracking and managing administrative costs, you can ensure you aren’t wasting time on projects that aren’t achieving anything.

The Internal Revenue Service (IRS) allows companies to deduct ordinary and necessary business expenses from their taxes, including the costs associated with running a business. These expenses must be incurred during the usual course of business and recorded in the year they are accrued.

Other Types of Administrative Expenses

Other types of administrative expenses include those that are intended to maintain the reputation and functioning of the organization, but aren’t directly related to day-to-day operations. These can include things like insurance for equipment replacement or maintenance, computer software updates, mailings, public announcement, and accounting services for meetings and special events.

Salaries and benefits paid to account and IT staff and all executive compensation and benefits will be reported as administrative expenses.

All of the travel expenses incurred by employees attending training sessions in relation to their jobs, meetings, conventions, workshops, and speaking engagements are considered administrative expenses.

The role of depreciation depends on the asset being depreciated. They can be classified as general, administrative, or selling (marketing) expenses. Many organizations choose to include consulting and legal services as administrative expenses. Most R&D costs are not considered administrative expenses.

For many companies, the best way to evaluate profitability is to allocate expenses between different business units. This gives managers an accurate view of profitability across each business unit to evaluate performance and make informed decisions about expansion or streamlining as needed.

Accounting for Administrative Expenses

In accounting, businesses usually account for administrative expenses at the time they are incurred. When dealing with many administrative expenses that repeat every month, it is best to record them periodically to ensure that your records are up to date.

You will probably need to know how increased or decreased sales affect the cost of each widget you sell. In order to determine this, you will have to do some accounting.

Your production and administrative expenses are an important part of your financial statements. They help you assess the cash flow implications of different sales scenarios. The more you are aware of how much you’re spending, the easier it will be for you to come up with a budget and make your projections as accurate as possible.

Administrative Expenses and Tax Deductions

The Internal Revenue Service permits any business to deduct the expenses incurred in running a business. This includes administrative costs such as printing and subscriptions, employee salary and benefits packages, continuing education and travel, tuition reimbursements, professional service providers, office supplies, and professional memberships.

Example of Administrative Expenses

  1. For example, if you’re maintaining the plant’s equipment and plumbing when you should be working on business operations, then that’s a non-administrative expense. On the other hand, if you’re maintaining the plant’s equipment because it’s required for day-to-day operations and you wouldn’t mind having it replaced one day, then that’s an administrative expense.
  2. If you have a large staff in your business and is responsible for many IT services, then employing a portion of those employees as temps could be an administrative expense. On the other hand, paying for consultants to perform similar functions could be an expense.

Key Takeaways

  • An administrative expense is any expense that directly impacts a business’s operations and maintenance, whether incurred during the accounting period or after a change in accounting principles.
  • Administrative costs vary based on the size and scope of an organization.
  • The most important thing to know about administrative expenses is that they are fixed. This means there may not be a direct relationship between the number of administrative expenses incurred and the level of sales that occur.