Administrative costs are expenses related to the business as a whole, not specific departments. They account for indirect expenses impacting the operation, such as compensation for executives and general services like accounting and inventory management. Monitoring these costs is crucial for a company’s financial well-being and may require restructuring during economic downturns.
An administrative cost is a type of business expense that has to do with any cost that is related to the business as a whole and not easily identifiable with a specific department. Considering expenses that have to do with the general services portion of business record keeping, an administrative cost helps account for indirect expenses that have some impact on the operation rather than being focused on a single area of the business. Businesses of any size will have some type of administrative expense that provides support and benefits to the entire operation and is not limited to just a small segment of the operation.
The general understanding of an administrative cost is any expense that has no direct relation to the production aspects of the business operation. Likewise, expenses of this type also do not include direct costs associated with the company’s marketing or financing efforts. Instead, these costs generally include activities that have some impact on all aspects of the operation, including manufacturing, marketing, and financing functions.
One of the most common examples of administrative costs has to do with the compensation offered to corporate executives. While most executives have assigned duties within the business operation, those duties are often broader than those of employees who are specifically assigned to work on the production line. Similarly, duties associated with ancillary but still critical departments that support the manufacturing, marketing and financial aspects of the business are typically classified under the broad rubric of general services. Some examples of general services include the day-to-day management of the company’s accounting records, labor relations, loss prevention, and supply and inventory functions.
While not linked to a specific department within the corporate structure, monitoring administrative costs is just as important to the overall financial well-being of the company as maintaining control of more direct costs. When it is necessary to reorganize the structure of a company in order to reduce expenses and allow the business to continue during an economic downturn or a change in consumer demand that reduces production to an extent, there is always the possibility that some changes in associated expenses will also take place on the executive branch or general services. This is especially true if an assessment of the business structure reveals that the tasks performed by two executives can be successfully managed by one or that the accounting processes can be managed by outsourcing the function rather than continuing to manage a full-fledged accounting department.
Protect your devices with Threat Protection by NordVPN
