Example Chart of Accounts for Selling General and Administrative Exp
Administrative Costs DefinitionAdministrative costs
, defined as the costs which are not directly related to operations, are generally 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 Explanation
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 support 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.
Administration Costs Example
Kent is an entrepreneur who is starting his first business: an ecommerce 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 can not risk losing them to employee salaries when the money could be better spent 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 with 2 dedicated workers. When Kent grew beyond his ability to research inventory, he hired a young college student who could find average market prices when Kent had more important things to do. Kent has even hired a marketing firm for his company, and now Kent spends most of his time leading the various departments he had created for his business.
Kent has also hired administrative staff. This includes an assistant. Kent's executive assistant is tasked 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.
Kent sees his administrative costs as a worthy expenditure: he can now focus on tasks more essential to his business. Kent appreciates this expense and now wonders how he once lived without it.