What Are Administrative Expenses? (With Types and Examples)

Indeed Editorial Team

Updated 20 September 2022

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While running a business, a company might incur various expenses. One such expense is the administrative or overhead expense that gives the overall cost associated with conducting business operations rather than creating or developing a new product or service. Understanding and tracking these expenses can help you to make financial forecasts, know the right time to hire new employees and claim tax deductions. In this article, we discuss what administrative expenses are, learn their importance and explore the different expenses a company might incur.

What Are Administrative Expenses?

Administrative expenses are the cost incurred by a company for work not directly related to sales, production, research and manufacturing. A company might incur overhead expenses to run a business, irrespective of the products or services the customer sells. Depending upon the company and the industry in which you work, the overhead expenses might vary from supplies to utilities to labour. Some are fixed expenses as they are part of the foundation of business operations. These expenses exist regardless of the level of production or sales that occurs.

Other overhead expenses might be semi-variable. For instance, a company might use some level of electricity to keep the lights on and beyond this point, the company can focus on reducing its electricity bills. The primary goal of every company is to eliminate overhead expenses without directly affecting the products or services the company sells. These costs are typically the first cost a company tries to reduce.

Related: Asset Vs Expense: Differences, Types And Best Practices

Why Are Administrative Expenses Important?

These expenses incorporate a range of costs and can affect a company's profitability. Here are some reasons why these expenses are important:

  • Forecasting: While some admin expenses are variables, others are fixed. Understanding why and how overhead expenses might change in the coming years can help in accurate planning and forecasting.

  • Budgeting: Knowing the money a business spends as overhead expenses can help set organisational budgets. Accurate budgets can help in managing expenses in the future.

  • Taxation: A company can deduct these overhead expenses from their taxes, helping a company save money. While most admin expenses are tax deductible, some expenses might not offer a tax deduction.

Related: How To Calculate Variable Cost In 3 Steps (With Examples)

Types Of Admin Expenses

Here are some types of admin expenses a company might incur:

Rent

Rent is an operating or admin expense that a business might incur every month. Typically, a company might use warehouses, workspaces, offices and other facilities to perform their business operations. For renting a space, a company signs a rental agreement allowing companies to use the space for a fixed monthly cost until the agreement expires.

Labour cost

Labour expenses that companies consider admin expenses are indirect costs of labour. Some labour costs are admin expenses, especially for employees who do not work on customer service, product development or sales. For example, salaries of executive-level employees, financial professionals and human resource employees come under the category of overhead expenses.

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Supplies

Office supplies like stationary, copy paper, pens, printer ink and other items are admin expenses. The cost of supply varies depending on the industry in which a company works. For instance, a university is likely to have a higher paper and pen consumption than a manufacturing company that depends on equipment and machinery. Office supplies can even include desks, chairs, telephones and computers.

Insurance policies

Another admin expense is the company's money on employee and business insurance. The policy a company purchases might vary depending upon the industry, work location and employees' job duties. Most companies have insurance policies protecting employees' safety in unforeseen circumstances. Other types of insurance include business income insurance which might protect a company if production stops and ensures employees receive payments if they get injured on the job. Some companies might invest in general liability insurance or business insurance, which helps cover businesses in lawsuits and property damages.

Legal counsel

Often, a business operation might involve focusing on legal requirements and industry regulations. Many companies might hire an in-house legal team that offers legal advice and manages legal proceedings. A company might have a list of lawyers and attorneys they can use when needed. These legal counsels ensure a company follows every industry regulation.

Related: How To Become A Legal Advisor (With Salary And Job Duties)

Information technology costs

Typically, the information technology (IT) cost includes expenses related to purchasing software and computers that a company might use. Many IT costs are one-time costs. They are admin expenses because they benefit the entire company and do not focus on any department.

Maintenance cost

Maintenance is necessary for the proper functioning of a company. Irrespective of the industry in which a company operates, maintenance needs for the company might include air conditioning or computer system repair. These can be one-time costs or recurring costs that a company incurs for maintaining the facility, property and equipment. Learning about these expenses can help companies decide how and when to purchase a piece of equipment or vehicle.

Related: What Is Cost Unit? (Definition, Calculation And Examples)

Tips For Lowering Admin Expenses

If your admin expenses show that a company spends too much time on expenses that do not contribute to success, follow these strategies to lower some of the company's expenses:

Rent instead of buying property and machinery

When starting a business, consider renting equipment, vehicle and office space. Renting a space or equipment requires a smaller upfront investment and can be a viable short-term solution. Often, renting a property for warehouse or office space offers a lower monthly cost than purchasing a property.

Increase remote work

Larger companies transitioning from office to remote work might save much money on admin expenses. In remote work, a company does not pay for renting offices or other utilities such as electricity and the internet. Investing in digital tools can make remote work cheaper than investing in offline offices.

Decrease travel time

Companies often invest in employee travel to serve various business purposes. Although business travel might be beneficial for some industries, it might not be viable for other industries. Limiting business travel and implementing teleconferencing solutions wherever necessary can significantly reduce admin expenses.

Sublease office space

When a company has additional or extra space in the office or warehouse, it can rent it to other individuals or companies looking for office space. This can increase a business's revenue stream and helps in offsetting the cost of building administrative cost. It serves as a great way to earn extra money.

Example Of Admin Expenses

Here is an example of an admin expense a company might incur:

A manufacturing company is preparing its income sheet for the end of the 2021 fiscal year. In the last fiscal year, the company spends ₹20,00,000 on raw materials for producing products, ₹10,00,000 on senior executive salaries and ₹25,00,000 on new manufacturing equipment. The company also spends ₹15,00,000 per year on rent and utilities in the office.

When listing the expenses on the income sheets, the company includes ₹25,00,000 as admin expenses, including employees' salaries and money spent on rent and utilities. Because the ₹45,00,000 the company spends on manufacturing equipment and materials contributed to manufacturing products, these expenses are not admin expenses.

Frequently Asked Questions About Admin Expenses.

Some frequently asked questions or FAQs about admin expenses include:

Are admin expenses tax deductible?

Most of the admin expenses, including rent, utilities, wages and telephones, are admin expenses. Typically, admin expenses that are reasonable, ordinary and necessary for business operations are tax deductible. But many admin expenses are not tax deductible. You can check with a professional tax accountant or attorney to understand the taxation laws and regulations.

Related: What Is A Cost Accountant? (With Duties, Salary And Skills)

Are admin expenses direct expenses?

Admin expenses are the indirect expenses a company incurs for the successful running of its business. Direct expenses are those that relate directly to the way a company earns a profit. It might include sales, production and manufacturing costs. As admin expenses support the entire company but do not help in producing or manufacturing a product, they are indirect expenses.

Related: What Is Cost Of Production? (With Factors That Affect It)

When do companies record admin expenses?

Typically, accountants record admin expenses during the accounting period in which the expenses take place. Often, this might mean that the period in which a company pays for an expense might differ from the period in which the accountant reports it. For instance, if a company purchases a warehouse in the first quarter of the fiscal year but receives it in the second quarter, the accountant can list this administrative expense in the first quarter instead of the second quarter.

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