Administration Expenses

Definition: Administration Expenses

Administration expenses refer to the costs a business incurs related to the general administration and operation functions of the organization. These costs are not directly tied to a specific product or service but are necessary for the overall management and day-to-day functions of the business. Administration expenses are a crucial part of a company’s fixed costs and are included in the income statement under operating expenses.

Examples of Administration Expenses

Salaries and wages of administrative staff, such as accountants, human resources personnel, legal advisors, and office managers.
Utilities including electricity, water, and heating consumed in office buildings.
Office supplies such as paper, writing instruments, printers, and computers.
Rent or lease payments for office space.
Insurance premiums for office buildings and general liability.
Depreciation on office equipment and buildings.
Professional fees for services such as accounting, legal, consulting, and auditing.
Telephone and internet expenses that are necessary for communication within and outside the company.
Travel and entertainment expenses associated with administrative activities.
Postage and shipping costs for mailing documents and packages.

Frequently Asked Questions (FAQ)

Q1: Are administration expenses the same as selling expenses?

No, administration expenses relate to the overall operation of the business, while selling expenses are directly associated with the selling activities, such as marketing and distribution costs.

Q2: Should administration expenses be classified as fixed or variable costs?

Generally, administration expenses are classified as fixed costs because they do not vary with production levels. However, some expenses, like utilities, may have variable components.

Q3: How do businesses control administration expenses?

Businesses can control administration expenses by implementing budgetary controls, renegotiating supplier contracts, adopting energy-saving measures, and optimizing office space utilization.

Q4: How are administration expenses reflected in financial statements?

Administration expenses are reported in the income statement under operating expenses. They are deducted from gross profit to calculate the operating profit.

Q5: Can administration expenses be allocated to production costs?

Typically, administration expenses are not allocated directly to production costs but are instead treated as period costs. However, some organizations might allocate a portion to different departments for internal management purposes.

Overhead Costs: Indirect costs associated with running a business that cannot be traced directly to any specific product, service, or department.
Fixed Costs: Business expenses that remain constant regardless of the level of production or sales.
Variable Costs: Costs that vary directly with the level of production or sales.
Operating Expenses: Expenses required for the day-to-day functioning of a business, including administration, selling, and general expenses.
Depreciation: Allocation of the cost of a tangible asset over its useful life.
Amortization: Similar to depreciation but pertains to intangible assets.

Online Resources for Further Information

Suggested Books for Further Studies

“Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso: Provides comprehensive information on accounting principles, including the handling and management of administration expenses.
“Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper: Offers a straightforward overview of accounting practices with clarity on different types of expenses.
“Management Accounting” by Anthony A. Atkinson, Robert S. Kaplan, and Ella Mae Matsumura: An in-depth look at managerial accounting, giving insights into how businesses manage and report administration expenses.

Accounting Basics: “Administration Expenses” Fundamentals Quiz

### Are salaries of administrative staff considered administration expenses? - [x] Yes, they are considered administration expenses. - [ ] No, they are classified under selling expenses. - [ ] Only part of them are considered administration expenses. - [ ] None of the above. > **Explanation:** Salaries of administrative staff, such as accountants and office managers, are counted as administration expenses because they are necessary for the general operations of the business. ### What type of cost are administration expenses typically classified as? - [ ] Variable Costs - [x] Fixed Costs - [ ] Mixed Costs - [ ] Direct Costs > **Explanation:** Administration expenses are generally classified as fixed costs, as they do not vary with production levels. ### Which of the following is NOT an example of administration expenses? - [ ] Office supplies - [ ] Utility bills - [x] Direct labor costs in manufacturing - [ ] Rent for office space > **Explanation:** Direct labor costs in manufacturing are not considered administration expenses; they are typically production costs. ### Where are administration expenses reported in the financial statements? - [ ] Balance Sheet - [x] Income Statement - [ ] Cash Flow Statement - [ ] Statement of Changes in Equity > **Explanation:** Administration expenses are reported under operating expenses in the income statement. ### Can administration expenses include depreciation? - [x] Yes, it can include depreciation on office equipment and buildings. - [ ] No, depreciation is recorded separately. - [ ] Only for intangible assets. - [ ] None of the above. > **Explanation:** Depreciation on office equipment and buildings can be included in administration expenses. ### What can be done to control administration expenses? - [ ] Increase production levels. - [x] Implement budgetary controls. - [ ] Increase sales. - [ ] Reduce wages of production staff. > **Explanation:** Implementing budgetary controls can help in monitoring and controlling administration expenses. ### What is the purpose of administration expenses? - [x] To support the general operations and management of the business. - [ ] To directly increase sales revenue. - [ ] To produce goods and services. - [ ] None of the above. > **Explanation:** Administration expenses support the general operations and management of the business, unlike costs associated with production or selling activities. ### Do utilities for the office count as administration expenses? - [x] Yes, they count as administration expenses. - [ ] No, they are counted under separate non-operating expenses. - [ ] Only if they surpass a certain amount. - [ ] Only if they are billed monthly. > **Explanation:** Utilities for the office, like electricity and water, are considered part of administration expenses. ### How often are administration expenses typically recorded? - [ ] Quarterly - [ ] Bi-annually - [x] Annually - [ ] Monthly > **Explanation:** Administration expenses are typically recorded annually in financial statements as part of the periodic expense reporting cycle. ### What differentiates administration expenses from production costs? - [ ] Administration expenses can be directly traced to the production of goods. - [x] Administration expenses are related to the general operations of the business and are not directly tied to production. - [ ] Both are the same. - [ ] Administration expenses include all variable costs. > **Explanation:** Administration expenses are not directly tied to the production of goods; instead, they are related to the overall management and operation of the business.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!