In general, administrative expenses refer to costs that are not directly tied to a specific function. Examples of these costs include the cost of finance and human resources. In addition to indirect costs, these can be fixed or semi-variable. This article explains the types of administrative expenses and how they affect business performance. Ultimately, these costs are necessary to the smooth operation of a business. Listed below are some of the most common administrative costs:
General and administrative expenses are costs that cannot be directly tied to a specific function
G&A is a broad category of expenses that are not directly tied to a specific function. It includes employee salaries and benefits, as well as other expenses incurred by employees. Examples of this kind of cost include moving a new employee to a new location and paying for their travel for job-related training. Companies often incur insurance costs for both employees and the company itself. Business income insurance protects the company if production is halted or if someone gets hurt on the job. Continuing education and training sessions for employees are also G&A costs.
Other types of G&A expenses are overhead costs. Some examples of general and administrative expenses include building rent, consulting fees, depreciation on office equipment, insurance, subscriptions, and utilities. The expenses of running a stained-glass workshop may also fall under this category. Rent and other building costs are expenses related to running a workshop. Utilities, including water and electricity, are also expenses related to the building. Minor operating expenses, such as cleaning, can also fall under this category.
In addition to operating and maintenance costs, universities also incur expenses related to departmental administration. Such expenses support common departmental objectives and activities. Typical departmental administration costs include salaries and fringe benefits for administrative personnel and professional staff involved in research, instruction, or grant preparation. These expenses can be further broken down by function or department. Expenditures for instrumentation are expenses for minor equipment, which are not capitalized and allocated to departments and functions proportionally based on space.
In addition to selling costs, general and administrative expenses are costs for the running of a business. In addition to direct materials and labor, general and administrative expenses cover many other expenses that have no direct connection to a specific function. For example, Company X spends $445,000 on administrative overhead in a fiscal year. As you can see, these expenses are common in every business. Understanding these costs is crucial for maintaining profitability.
They are indirect costs
To determine the indirect cost rate, organizations must submit proposals to the cognizant federal agency. This agency acts on behalf of all federal agencies in the indirect cost rate negotiation process. It is usually the agency from which the organization receives the majority of its direct federal funding. Indirect costs are not included in the total direct costs of the organization, but they must be allocated appropriately to the different programs. If a grantee receives more than $10 million in federal funding annually, the agency that receives the majority of its funds must approve the proposals.
Other examples of indirect costs include depreciation on office equipment and fixtures, legal counsel fees, and accounting staff. Direct costs, on the other hand, are directly related to the cost object itself. Examples of direct costs include the costs of consumable supplies, direct materials, and sales commissions. Variable overhead costs include freight and electricity. When these costs exceed the direct costs, they are considered indirect. Listed below are some common examples of direct costs.
Indirect costs are those that cannot be easily attributed to a specific project or program. Typically, these costs are grouped into common pools and charged to the benefiting objectives through an allocation process. Oftentimes, an indirect cost rate is used to determine the proportion of general expenses. This rate is a ratio of the total indirect costs of an applicant to a certain base of direct expenses. A good rule of thumb is to claim no more than 10 percent of direct costs.
Indirect costs include payroll, accounting, general institutional services, and departmental administrative costs. These costs do not include costs related to federal government funding. The University recovers these costs by charging a negotiated indirect cost rate against the modified total direct cost base. If a proposal is well received, it may be possible to negotiate for a budget reduction. However, the principal investigators are not allowed to negotiate indirect cost rates with sponsors. Instead, this is a responsibility of the OSPR staff.
They are fixed costs
Administrative expenses are overhead costs that are not directly attributable to the production of goods or services. These expenses appear under the Cost of Goods Sold and are included in the determination of net profit. Administrative expenses are usually categorized under fixed costs and include rent, utilities, insurance, salaries, and office supplies. Generally, administrative expenses are fixed with respect to sales. To help you determine the amount of administrative expenses that your company should spend each year, consider these common examples.
They are semi-variable costs
As mentioned, administrative expenses are partially fixed and partly variable. Most expenses fall into this category. Examples of such costs are telephone bills, repairs and maintenance, and administrative expenses. If the cost is fixed, it must equal the cost as specified. If it is variable, the cost is based on how much the company spends for the same services. The fixed cost is $40 per month, while the variable cost is $0.10 per minute above 500 minutes.
While most businesses don’t make a distinction between fixed and variable costs, semi-variable costs are a common type of cost that companies have to account for. These costs can be categorized into any expense account, but aren’t reported on financial statements. Instead, they show up on the income statement. While these expenses do not change much, they can be tracked easily by using bookkeeping software like BookKeeping Express.
In some cases, management will allocate administrative expenses to specific business units. For example, a company may allocate certain costs to the salaries of senior management and the costs associated with supplies and general services. Since these costs do not directly result in the production of goods or services, they are typically excluded from gross margin calculations. A firm may choose to include administrative expenses as a separate line item in its income statement. However, the amount of these expenses is subject to change based on the amount of money it receives in revenue.
Another example of administrative expenses is electricity. While this is an essential expense for any business, it may be difficult to accurately predict when it will happen. Many of these costs are fixed, such as rent. However, some of them are semi-variable, and fluctuate with the volume of business. For example, an accountant might use more printer toner during the first quarter of the year, while their electricity bill can increase over the same period.
They are deducted from net revenue to determine gross margin
In the financial statement, the gross profit margin is the percentage of revenues left after deducting the cost of goods sold (COGS) from those revenue. It is the primary measurement of profitability and drives the amount of budget expenditures for a business. For example, if a business has a gross profit margin of 35%, it means that it retains $0.35 for every dollar of revenue. The remainder of the money is then used to pay interest fees and debt payments and for dividend distributions. Companies use gross margin to monitor production costs. If the number falls below a certain point, it may be time to reduce expenses or source cheaper suppliers.
Besides keeping track of sales and marketing costs, it is crucial to keep track of selling and administrative expenses. These expenses are often the first place companies start their cost-cutting efforts. Typically, selling and administrative expenses represent the largest cost-containment opportunities. According to Accenture research, travel expenses account for between 10% and 12% of the total budget, and yet represent about one percent of the total revenue.
In the financial statement, the gross profit margin represents the difference between net revenues and sales after adjustments. In the case of a product-based business, gross profit margin can be calculated by subtracting the cost of goods sold (COGS) from total sales revenue. COGS includes the costs of raw materials, manufacturing or warehouse labor, inbound shipping, and other expenses. Administrative expenses are also deducted from net revenue to determine gross margin.
Selling, general and administrative (SG&A) expenses are the costs of running the business. They include salaries, rent, utilities, advertising, marketing, and technology. Interest and other forms of interest are not included. SG&A expenses are further broken down into selling and general expenses. These expenses are the costs of marketing and selling the goods sold to customers. This means that the gross margin is lower.
In conclusion, administrative expense is a necessary part of any business. It helps to keep the company organized and running smoothly. However, it is important to keep these costs as low as possible so that they do not impact the bottom line. There are many ways to reduce administrative expenses, such as automating tasks and outsourcing work. By following these tips, businesses can save money and improve their bottom line.