Administrative cost

Administrative cost
See also
Fixed overhead Cost of processing Direct expense Types of logistics costs Costing system Direct labor cost Preliminary expenses Financial controlling Non recurring cost Loss contingency

Administrative costs refer to the expenses incurred by a company or organization for the management and operation of the business, such as payroll, rent, legal fees, and accounting services. These costs are separate from the direct costs of producing goods or providing services, such as materials or labor. Administrative costs can be a significant portion of a company's overall expenses and are often closely monitored and controlled by management to improve efficiency and profitability.

Administrative costs classification

Administrative costs can be classified in various ways, depending on the organization and the level of detail needed. Some common classifications include:

• Fixed vs. variable: Fixed administrative costs are those that do not change with changes in production or sales volume, such as rent or insurance. Variable administrative costs, on the other hand, do change with changes in production or sales volume, such as the cost of office supplies.
• Indirect vs. direct: Indirect administrative costs are those that cannot be traced directly to a specific product or service, such as general office expenses. Direct administrative costs, on the other hand, can be traced directly to a specific product or service, such as the salary of a salesperson.
• Operating vs. non-operating: Operating administrative costs are those that are directly related to the day-to-day operations of the business, such as the cost of electricity. Non-operating administrative costs are those that are not directly related to the day-to-day operations, such as the cost of a lawsuit.
• Overhead vs. general and administrative: Overhead costs are indirect costs that are necessary to run a business but are not directly related to the production of goods or services. General and administrative costs are costs associated with the overall management and administration of a company, such as accounting and legal services.

This classification are not universally accepted and may vary by company or industry.

Examples of administrative costs

Healthcare

In the healthcare industry, administrative costs refer to the expenses incurred by healthcare providers, such as hospitals, clinics, and insurance companies, for the management and operation of their business. Some examples of administrative costs in healthcare include:

• Salaries and benefits of administrative staff, such as office managers, human resources personnel, and billing specialists
• Rent and utilities for office and clinical space
• Legal and accounting fees
• Information technology and software costs, including electronic health record systems
• Marketing and advertising expenses
• Insurance costs, including liability insurance and worker's compensation insurance
• Compliance and regulatory costs associated with government regulations, such as HIPAA and the Affordable Care Act
• Supply and equipment costs for office and clinical operations
• Credentialing and accreditation fees
• Billing and collections expenses
• Research and development costs for new medical treatments and technologies.

These costs can be significant and can vary depending on the size and type of healthcare organization and the specific services provided.

Non-government organizations

In non-governmental organizations (NGOs), administrative costs refer to the expenses incurred for the management and operation of the organization. Some examples of administrative costs in NGOs include:

• Salaries and benefits of administrative staff, such as office managers, human resources personnel, and fundraising specialists
• Rent and utilities for office space
• Legal and accounting fees
• Information technology and software costs, including databases and accounting systems
• Marketing and advertising expenses
• Insurance costs, including liability insurance and worker's compensation insurance
• Compliance and regulatory costs associated with government regulations and standards
• Supply and equipment costs for office and program operations
• Research and development costs for new programs and initiatives
• Travel costs for staff and volunteers
• Fundraising expenses, such as printing and mailing costs for fundraising materials
• Office expenses, such as office supplies and postage.

It's worth mentioning that NGOs are often a non-profit organization, thus their financial statements may differ from a for-profit organization, and the way they report their administrative costs and expenses may vary.

Administrative costs monitoring

Monitoring administrative costs is an important aspect of managing a business or organization, as it helps ensure that expenses are under control and that resources are being used efficiently. Here are some strategies for monitoring administrative costs:

• Create a budget: A budget is a detailed plan of projected income and expenses for a specific period of time. By creating a budget, you can establish a baseline for your administrative costs and compare actual expenses to your budgeted amounts.
• Track expenses: Keep detailed records of all administrative costs, including invoices, receipts, and bank statements. This will allow you to identify patterns and trends in your expenses, and make adjustments as needed.
• Use accounting software: Using accounting software can automate the process of tracking expenses and can provide detailed reports on your administrative costs. This can help you identify areas where expenses are higher than expected and take action to reduce them.
• Compare to industry benchmarks: Research the administrative costs of other organizations in your industry. This can help you identify areas where you are spending more or less than your peers and adjust accordingly.
• Review expenses regularly: Regularly review your administrative costs, either monthly or quarterly, to identify any unusual or unexpected expenses. This will help you address any issues quickly before they become a problem.
• Assign responsibilities: Assign specific staff members to monitor expenses and report to management. This can help ensure that expenses are being tracked and reported accurately and promptly.
• Implement cost-saving measures: Once you have identified areas where expenses are higher than expected, implement cost-saving measures such as negotiating with vendors for lower prices, using more energy-efficient equipment, or outsourcing non-core business functions.

By monitoring administrative costs regularly and taking action to reduce them as needed, you can help ensure that your organization is using its resources efficiently and effectively.

References

• He, D., Teruya, J., & Shimizu, T. (2010). Sticky selling, general, and administrative cost behavior and its changes in Japan. Global Journal of Business Research, 4(4), 1-10.
• Ashley, S. R., & Van Slyke, D. M. (2012). The influence of administrative cost ratios on state government grant allocations to nonprofits. Public Administration Review, 72(s1), S47-S56.
• He, A. J., & Qian, J. (2013). Hospitals' responses to administrative cost-containment policy in urban China: the case of Fujian Province. The China Quarterly, 216, 946-969.