Definition
Administration overhead, also known as administration expenses, refers to the portion of an organization’s general overhead incurred during the execution of its administrative activities. These expenses include costs related to general office salaries, stationery, telephones, and other essential items necessary for the smooth functioning of the organization’s administrative functions.
Examples
- Salaries of Office Staff: The wages paid to employees working in administrative roles such as the HR department, reception, and clerical staff.
- Stationery Costs: Expenses include paper, pens, folders, and other office supplies necessary for daily operations.
- Telecommunication Expenses: Costs associated with telephone usage, internet services, and other communication tools required to maintain business activities.
- Office Rent: The rental costs of office space utilized for administrative purposes.
- Utilities: Expenses for electricity, water, and heating required for the office premises.
Frequently Asked Questions
What is included in administration overhead?
Administration overhead includes various costs associated with running an organization’s administrative functions, such as salaries for office staff, stationery, telecommunication, office rent, and utilities.
How is administration overhead different from other overhead costs?
Administration overhead specifically pertains to costs incurred in administrative activities, while other overhead costs might include manufacturing overhead related to production or selling expenses related to marketing and sales activities.
Are administrative expenses fixed or variable costs?
Administrative expenses can be both fixed and variable. Fixed costs include salaries and office rent, while variable costs may include items like postage and office supplies, which fluctuate with business activity levels.
How can businesses reduce administrative overhead?
Businesses can reduce administrative overhead by optimizing the use of office space, negotiating better rates for telecommunications and utilities, and employing technology to improve efficiency and reduce manual labor.
Are administration overheads tax-deductible?
Yes, administration overheads are typically tax-deductible as they are necessary and ordinary expenses incurred in carrying out business operations.
Overhead
General costs and expenses required to operate a business that are not directly associated with product manufacturing or sales activities.
Fixed Costs
Expenses that do not change with the level of goods or services produced by the business, such as rent and salaries.
Variable Costs
Costs that vary directly with the level of business activity, such as raw material costs and utility expenses.
General and Administrative Expenses (G&A)
A broader category encompassing all indirect expenses related to the general administration and management of the business.
Online References
Suggested Books for Further Studies
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper - This book provides foundational layers of accounting, including overhead concepts.
- “Financial Accounting: The Impact on Decision Makers” by Gary A. Porter and Curtis L. Norton - A comprehensive guide to financial accounting principles and practices.
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren - Focuses on various aspects of overhead and cost management.
- “Management and Cost Accounting” by Alnoor Bhimani and Charles T. Horngren – Covers in-depth cost accounting and management strategies, including administrative overheads.
Accounting Basics: “Administration Overhead” Fundamentals Quiz
### Which of the following best describes administration overhead?
- [ ] Costs associated directly with manufacturing processes.
- [ ] Expenses incurred to maintain marketing efforts.
- [x] Costs incurred in carrying out administrative activities of an organization.
- [ ] Only expenses related to utilities.
> **Explanation:** Administration overhead includes expenses incurred for administrative activities such as office salaries, telecommunication, and stationery, but not direct manufacturing or marketing costs.
### Which of these expenses would not fall under administration overhead?
- [ ] Office rent
- [ ] Employee salary for HR staff
- [ ] Telephone bills
- [x] Raw material costs
> **Explanation:** Raw material costs pertain to production overhead and not administrative overhead, which caters to expenses like office rent, HR salaries, and telephone bills.
### What is a fixed component of administrative overhead?
- [ ] Postage costs
- [ ] Stationery expenses
- [ ] Utility costs
- [x] Office rent
> **Explanation:** Office rent is usually a fixed cost, while postage, stationery, and utility costs can vary.
### Administration overhead can include which of these expenses?
- [ ] Depreciation of manufacturing equipment
- [x] Office supplies and stationery
- [ ] Direct labor in the manufacturing process
- [ ] Sales commissions
> **Explanation:** Office supplies and stationery fall under administration overhead, unlike expenses related to the direct production process or sales activities.
### How do variable costs within administration overhead behave?
- [ ] They remain constant regardless of business activity.
- [x] They fluctuate based on the level of administrative activity.
- [ ] They are exclusively associated with production volume.
- [ ] They depend solely on utility usage.
> **Explanation:** Variable costs within administration overhead, such as postage and office supplies, fluctuate depending on the level of administrative activity.
### Can telecommunication expenses be classified under administration overhead?
- [x] Yes, they are part of administrative expenses.
- [ ] No, they are only under production overhead.
- [ ] Only if they exceed a certain amount.
- [ ] No, these costs are too variable.
> **Explanation:** Telecommunication expenses are a part of general administrative costs necessary for maintaining daily business operations.
### Which overhead is directly related to the general running of the company and not tied to a specific department like production?
- [ ] Selling overhead
- [x] Administration overhead
- [ ] Production overhead
- [ ] Dedicated overhead
> **Explanation:** Administration overhead is related to general administrative activities of the company and is not specific to departments like production or sales.
### Is it possible to entirely eliminate administrative overhead?
- [ ] Yes, with proper planning.
- [x] No, it can be minimized but not eliminated.
- [ ] Yes, by outsourcing all administrative tasks.
- [ ] No, it is ever-increasing and uncontrollable.
> **Explanation:** Administrative overhead can be minimized but not entirely eliminated, as some level of administrative cost is essential for running any business.
### How can technology impact administrative overhead?
- [ ] It cannot impact overheads.
- [ ] It increases fixed costs substantially.
- [x] It can help in reducing overhead by improving efficiency.
- [ ] It eliminates the need for office supplies.
> **Explanation:** Technology can help reduce administrative overhead by improving efficiency in processes, reducing manual labor, and optimizing office functions.
### Which best describes the primary function of administrative overhead?
- [ ] Supporting production facilities.
- [ ] Enhancing marketing efforts.
- [x] Facilitating general office operations and administrative tasks.
- [ ] Directly contributing to revenue generation.
> **Explanation:** The primary function of administrative overhead is to support and facilitate general office operations and necessary administrative tasks, not directly linked to production or marketing.
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