What Are Administrative Expenses?
Administrative expenses are necessary costs that are associated with the management, clerical, and general functions within an organization that cannot be directly applied to some expense category related to the operation. Sometimes considered part of general business expense, an administrative expense can take the form of such basic needs as rental space for the business, the cost of utilities, or even the salaries of personnel that are not involved in the sales efforts of the company.
Sometimes referred to as general expenses, administrative expenses focus on costs that offer a wide benefit to the organization. As such, their benefits transcend departmental lines and make it possible for the many necessary functions to successfully take place. For the most part, any expense that is limited to a particular division or department of the company, while offering little or no direct benefit to other areas of the organization, cannot be considered a general administrative expense. Some expenses that seem tied to one department, like accounting or legal, are considered administrative because they benefit the entire organization.
One of the most common types of administrative expenses found in just about any organization is the cost of utilities. Charges for heating, cooling, power, and water are all traditionally identified as administrative and general expenses. In recent years, costs for Internet access, landline and mobile telephone services are also included as general expenses. However, there is some difference of opinion as to whether mobile services should be considered a general expense or if the cost should be classified as an expense related specifically to the departments of employees who actually use the services.
Another example of administrative expenses is the cost of leasing or renting space for the operation of the organization. This can include leasing retail store space, a suite of offices in an office building, or the rental of manufacturing facilities. Since the entire organization benefits from having space to operate, it is not possible in most cases to directly associate this charge with a specific department within the organization.
Salaries can also be considered among general administrative expenses. This is particularly true with managers and general administrators whose responsibilities involve them in many different areas of the operation. Since more than one area has the direct benefit of the manager’s efforts, the expense is considered to be general in nature.
While regulations used to define administrative expenses vary somewhat around the world, there are some types of expenses that are hardly ever defined as general in nature. These include any expenses that can be directly connected with sales and marketing efforts, or research into the development of a new product or service. Manufacturing costs, both in terms of equipment and raw materials, are also not likely to be considered an administrative expense under any circumstances.
Written by Malcolm Tatum
