Define administrative costs as the costs not directly related to operations. Generally, they are incurred in the process of directing a company. These costs, though indirect, are still important because they assist those who operate and sell company products by making their work more efficient.
Administrative costs, explained as the cost incurred in the administration of company directives, are a very important expenditure. Two main types of costs exist: direct and indirect. While direct costs are incurred in the process of direct company operations (such as sales or distribution), indirect costs supports this. These indirect costs, including administrative costs, enable those directly involved in company operations to complete their tasks rather then being distracted by other tasks. An example makes this evident: rather than putting each marketing cost in a company accounting system the marketing department spends the budget it has and keeps invoices. The accounting department, a section of the total administrative costs accounting for the company finances, then takes these invoices and compares them to company accounts. Administrative costs allow the maximization of effort in the expertise of each department: marketing, inventory, and even accounting.
For example, Kent is an entrepreneur who is starting his first business: an e-commerce store. Kent is new to the game and has a lot to learn. Still, his drive to his goal combined with his professionalism give him a good chance of success.
When Kent begins to create his company, he is all departments: marketing, fulfillment, administration, and even the company cleaning person. Kent begins his business like this in order to minimize costs. Though he has savings, he cannot risk losing them to employee salaries when he could better spend the money elsewhere.
Three years into the future Kent’s business is booming. Kent hardly has time to keep track of all the tasks in his day. When he began to grow beyond his ability to ship orders, he created a small shipping warehouse. He then hired 2 dedicated workers. When Kent grew beyond his ability to research inventory, he hired a young college student who could find average market prices. Kent had more important things to do. Kent even hired a marketing firm for his company. Now Kent spends most of his time leading the various departments he created for his business.
Kent has also hired administrative staff. This includes an assistant. Kent tasks his executive assistant with keeping appointments, light bookkeeping, and communicating between Kent and the departments of his company. Though he only has one assistant, he also now has administrative costs.
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