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Businesses incur different types of expenses. In addition to costs associated with manufacturing and selling, they also attract administrative expenses associated with other activities related to the business.
Continue reading to find out what administrative expenses are and see some examples. You’ll discover why administrative expenses are usually fixed or semi-variable costs and where you should include them on the income statement.
We also cover how you can save time and money managing administrative costs such as travel expenses with Wise Business Expense Cards.
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When looking at what are administrative expenses, the simple answer is these are any costs that aren’t related to a core function of the business¹, such as manufacturing, production, or sales. You’ll often see them referred to as general expenses in accounting.
Administrative expenses are indirect expenses as they’re related to operating and maintaining a business overall. For example wages paid to administrative roles.
On the other hand, direct expenses are costs associated with a specific product’s production. For example, materials used in the manufacture of a mobile phone case.
There are several types of costs that are associated with business operations. Some administration expenses examples include:
- Wages and benefits for the executive team
- Depreciation on office furnishings and equipment
- Office supplies
You could save time and money on some of these expenses, specially if the costs involve foreign transactions, such as travel overseas or services subscriptions from abroad. With Wise Expense Cards your team can spend in foreign currencies securing the mid-market exchange rate with no hidden fees. Each card costs a one-time fee of 3 GBP, with no monthly subscription!
To give you a clearer idea of what administrative expenses are, it’s useful to compare them with non-administrative expenses.
|Costs of a business that aren’t directly related to a specific core function, such as production, manufacturing, or sales. Examples:
|Those expenses of a business that are directly related to manufacturing, production, and sales. Examples:
When considering an administrative cost, you’ll normally find that it’s fixed. In some cases, these costs can also be semi-variable, but they’re very rarely variable. Taking a closer look at fixed, semi-variable, and variable expenses makes the situation clearer.
The thing that defines the fixed costs of a business is that they remain the same over a period of time. So, fixed expenses are not affected by production output or sales figues². They do not go up and down, no matter how many goods you produce or how much product you sell.
|The payment of rent for business premises or the payment of salaries for the management team. These expenses remain the same over time and are not impacted by sales or production.
A semi-variable expense has a fixed portion that exists independent of business activity. It also has a variable portion that can change with different levels of activity³. Businesses try to change the variable portion of these costs by manipulating activity levels. They do this because semi-variable costs with a lower fixed portion lead to a lower break-even point.
Like fixed administrative costs, semi-variable administrative costs relate to the basic operation of the business. However, they also vary depending on the activity levels of the business.
|Your business has to pay for electricity as a basic cost, but the amount you pay may vary depending on production levels.
Variable expenses go up or down depending on the activity of a business. They increase if production increases, and they decrease if production levels drop⁴. This is in marked contrast to fixed costs which are not dependent on activity levels. The costs of materials, commission and transaction fees are all examples of variable expenses.
None of these costs are administrative expenses, as they’re associated with production, manufacturing, and sales. It’s rare for administrative costs to be variable as they’re not associated with a core function of the business that could attract variable costs.
When you’re looking at how to calculate administrative expenses, you should tally them on a regular basis. If you have a lot of costs incurred by your business, it helps to carry out this procedure daily. This is a useful tip for tracking your business expenses efficiently.
You should list a total figure for administrative expenses on your income statement directly below the Cost of Goods Sold (COGS). Administrative expenses can be grouped with sales-related expenses as selling general and administrative expenses, or they can be listed separately.
The income statement, also known as a profit and loss statement, is one of three important financial statements for your business. The other two statements are the balance sheet and the cash flow statement.
The income statement relates to the revenue, expenses, gains, and losses of your business⁵. So, it provides vital insights into how your business is operating and which areas may be underperforming. Ultimately, the income statement also reveals your net income, which is a vital calculation when you’re measuring the performance of your business.
Managing expenses can get easier if your business uses expense management software, as it allows you to be more accurate with your record keeping and also save time cutting manual admin.
But you can also simplify the management of your expenses using Wise Expense Cards. You can manage employee expenses easily and cleanly, even when dealing with several different currencies.
You don’t have to worry about monthly subscriptions or currency exchange mark-up fees, Wise Expense Card has only a one-time fee of 3 GBP per card, and you will always get the mid-market exchange rate.
You can order Wise Expense Cards after registering to Wise Business Multi-Currency Account, which also offers you:
- No monthly fees, just one-off fee upon registration;
- Quick to open and fully online;
- Send money for more than 80 countries;
- Receive international payments;
- You can hold and convert money in more than 50 currencies;
- And some more features to help you grow your business internationally.
In summary, administrative expenses are costs your business incurs that are not directly related to a core function such as production, manufacturing, or sales.
These costs are most often fixed expenses, but they can also be semi-variable. All administrative costs should be tallied on a regular basis.
They should be entered on the income statement directly below COGS, and can be grouped with sales costs as selling, general and administrative expenses or listed separately.
Sources used in this article:
- What Are Administrative Expenses, and What Are Some Examples?
- What Are Fixed and Variable Expenses? - business.com
- Semi-Variable Cost Definition
- How To Calculate Variable Expenses (With Examples) | Indeed.com
- Income Statement: How to Read and Use It
Sources last checked at 01/11/2022.
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise Payments Limited or its subsidiaries and its affiliates, and it is not intended as a substitute for obtaining advice from a financial advisor or any other professional.
We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
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