What Is an Administrative Cost?

Malcolm Tatum

An administrative cost is a type of business expense that has to do with any costs that are related to the company operation as a whole, and not readily identified with a specific department. Considered expenses that have to do with the general services portion of the corporate record keeping, an administrative cost helps to account for indirect expenses that have some impact across the operation rather than being focused on a single area of the business. Companies of just about any size will have some type of administrative expenses that provide some support and benefit to the operation as a whole and are not limited to only a small segment of the operation.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The general understanding of an administrative cost is any expense that does not have a direct relation to the production aspects of the business operation. In like manner, expenses of this type also do not include direct costs associated with the marketing or financing efforts of the business. Instead, these costs will usually encompass tasks that have some impact on all aspects of the operation, include the production, marketing, and financing functions.

One of the more common examples of an administrative cost has to do with the compensation that is tendered to corporate executives. While most executives do have assigned tasks within the business operation, those tasks are often broader than those of employees who are specifically assigned to work on the production line. In like manner, tasks associated with the ancillary but still critical departments that support the production, marketing and financial aspects of the business are generally classified under the broad heading of general services. Some examples of general services include the day to day management of the company’s accounting records, industrial relations, loss prevention, and supply and inventory functions.

While not connected with a specific department within the corporate structure, tracking administrative cost is just as important to the overall financial well being of the company as maintaining control of more direct costs. When there is a need to reorganize a company structure in order to reduce expenses and allow the business to continue during an economic downturn or change in consumer demand that curtails production to come extent, there is always the possibility that some shifts in the expenses associated with the executive branch or in general services will also take place. This is especially true if an evaluation of the company structure reveals that tasks performed by two executives can be successfully managed by one, or that the accounting processes can be handled by outsourcing the function rather than continuing to operate a full-fledged accounting department.

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