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Administrative Costs in Accounting: Definition & Examples

Instructor: Ryan Morales
In this lesson, you will learn more about the definition and examples of administrative expenses. Further, you will also learn how this category of expenses is presented on the face of the income statement.

As an accounting intern, you have been asked by your supervisor to prepare the company's monthly income statement. You receive a report containing the breakdown of administrative expenses for the month from another accounting staff member. You notice that this same report has been certified as correct. You want to make your supervisor happy so you check that the monthly income statement is prepared correctly. From the given report, you want to make sure that these items are correctly categorized as administrative expenses and that they are presented accurately on the face of the income statement.

Administrative Expenses Defined

Administrative expenses are costs related to the general administration of the business. This category of costs does not relate specifically to any business function such as production and sales. These costs are incurred at the corporate level, rather than by individual departments or business units. Looking at cost behavior, most administrative costs are fixed, though some are also variable and mixed.

During periods of cost cutting, experts are quite unsettled as to their take on administrative expenses. Some say that because these costs do not directly contribute to revenue generation, they are normally the first ones to be budgeted out. Others argue that since most of these costs are fixed, they are really difficult to cut.

Presentation in the Income Statement

On the face of the income statement, administrative expenses are presented as part of operating expenses, along with the company's selling expenses. Operating expenses are deducted from gross profit or gross income to arrive at operating income before finance cost and taxes. Administrative expenses may be presented as a one-line item. However, if there are certain administrative expense items that the company considers material, these may be presented separately as other line items.

Examples of Administrative Expenses

1. Executive Salaries and Bonuses

2. Professional Fees such as Legal, Consulting and Audit Fees

3. Office Supplies

4. Subscriptions

5. Salaries and Wages of personnel performing staff functions like the accounting department, human resources, etc.

What About Insurance, Depreciation, Rent, and Utilities?

1. Insurance. Generally, insurance is included in the administrative expenses category. However, to be more specific, property insurance will be presented either as part of manufacturing overhead, selling or administrative expenses. If the related asset is used in production, then the property insurance is manufacturing overhead. If the related asset is used in the sales function like store building or delivery equipment, then the cost is a selling expense. If the cost cannot be attributable to production or sales, then insurance is an administrative expense.

2. Depreciation. This rule is similar to the one above. The classification of depreciation expenses is parallel to the related asset. Is the asset being depreciated used in production or sales? To answer this question, the depreciation is manufacturing overhead or a selling expense, respectively. Otherwise, it is an administrative expense.

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