what are administrative expenses 
administrative expenses are expenses incurred by an organization that are not directly tied to a specific core function such as manufacturing production or sales these overhead expenses are related to the organization as a whole rather than to individual departments or business units understanding administrative expensesadministrative expenses may include the salaries of senior management and the costs associated with general services or supplies such as legal accounting clerical work and information technology these costs generally aren t directly related to the production of goods or services and are usually excluded from gross margins companies incur administrative expenses to perform basic operations such as administering payroll or healthcare benefits they incur them to increase oversight and efficiency and or to comply with laws and regulations administrative expenses appear below cost of goods sold cogs on the income statement and they may be shown as an aggregate with other expenses such as general or selling expenses some administrative expenses are fixed in nature because they re incurred as part of the foundation of business operations they would exist regardless of the level of production or sales that occur other administrative expenses are semi variable a business will always use some minimum level of electricity to keep the lights on it can take measures to reduce its electric bill beyond that point a business can eliminate administrative expenses without a direct impact on the product it sells or produces so these costs are typically first in line for budget cuts management is strongly motivated to maintain low administrative expenses relative to other costs because this allows a business to use leverage more effectively the sales to administrative expense ratio helps companies measure how much sales revenue is being portioned to cover administrative costs companies can deduct administrative expenses that are reasonable ordinary and necessary for business operations on their tax returns these expenses must be incurred during the usual course of business and deducted in the year they re incurred 1other types of administrative expenseswages and benefits to certain employees such as accounting and it staff are considered to be administrative expenses all executive compensation and benefits are considered to be administrative expenses building leases insurance subscriptions utilities and office supplies may be classified as general expenses or administrative expenses depreciation expenses may be classified as general administrative or selling marketing expenses depending on the asset being depreciated organizations may choose to include consulting and legal fees as administrative expenses as well but research and development r d costs aren t considered to be administrative expenses a company may allocate administrative expenses to each of its departments based on a percentage of revenue expenses square footage or other measures this allows management to make decisions internally about expanding or reducing individual business units example of administrative expensesxyz company might allocate the cost according to the square footage each department occupies if it spends 4 000 monthly on electricity and records this as an administrative expense assume the company occupies 5 000 square feet the electric bill could be allocated as follows 