Administrative expenses refer to the costs that an organization incurs. These costs include benefits and salaries for administrative staff, rent, and managerial compensation.
What Are Administrative Expenses?
Administrative expenses are the costs that a company incurs, including, but not limited to, salaries and benefits for administrative staff, rent and managerial compensation. These are costs separate from sales, marketing and research. They are considered an indirect expense since they do not contribute to manufacturing a product.
What Qualifies as Administrative Expenses?
Administrative expenses include all salaries of senior managers. They also have costs associated with general supplies, such as legal, accounting, clerical work and IT. The costs are usually not directly related to the production of services and goods and are excluded from the gross margins.
Administrative expenses are incurred to allow a company to perform essential functions, increase efficiency and oversight, and comply with the law. They are sometimes fixed in nature and could be incurred as part of continued business operations. For example, they could include electricity costs needed to keep lights on.
Since businesses can eliminate administrative expenses without affecting their production levels, these costs are often targeted first during budget cuts. Management is usually motivated to keep these costs low, as it allows a business to use its leverage better.
What Do Administrative Expenses Mean for Investors?
For investors, administrative expenses can help better evaluate how a company invests resources. It helps to understand what portion of the company is an indirect expense relative to direct operating costs. It also helps to determine the relative cash position.