Definition:
Administrative costs are expenses incurred in the general management of a business, as opposed to costs directly related to production or sales. They are often considered overhead costs that are allocated to various products or services.
Example:
Common examples of administrative costs include:
- Salaries and wages: Salaries and wages of administrative staff, such as executives, managers, and office personnel.
- Rent and utilities: Costs associated with office space, such as rent, utilities, and maintenance.
- Insurance: Insurance premiums for property, liability, and employee benefits.
- Legal and professional fees: Fees for legal services, accounting services, and consulting services.
- Office supplies: Costs of office supplies, such as paper, pens, and computers.
- Travel and entertainment: Costs associated with business travel and entertaining clients.
Why are administrative costs important?
- Cost allocation: Administrative costs are often allocated to products or services using overhead allocation methods, such as direct labor hours or machine hours.
- Profitability analysis: Understanding administrative costs is important for assessing a company’s profitability.
- Cost control: Identifying and managing administrative costs can help businesses reduce expenses and improve profitability.
In essence, administrative costs are the expenses incurred in the general management of a business, and they are an important factor in determining a company’s overall profitability.
