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The costs incurred by a business for its general management and operations are known as administrative expenses. Salary, rent, utilities, office supplies, legal fees, accounting services, insurance, and other overhead charges are some of these costs. Selling, general, and administrative (SG&A) and operating expenses are other names for administrative costs.
Administrative expenses should be monitored and kept under control because they can significantly affect a company's efficiency and profitability. In most cases, administrative costs are stable or semi-variable, which means that they are not greatly affected by the volume of sales or output. Certain administrative costs, however, can be optional, which means that, depending on the circumstances of the company, they could be reduced or eliminated.
Calculating the administrative expense ratio, which is the proportion of administrative expenses to total sales, is one technique to assess the performance of administrative costs. A lower ratio shows that the company is investing more in producing revenue and less in running its operations. A greater ratio shows that the company is investing more in management functions and less in revenue-generating ones. The best ratio will vary depending on the kind, size, and industry of the company.
Comparing administrative expenses to the industry average or benchmark is another technique to assess their performance. This might assist in locating opportunities for the company to increase productivity and cut expenses. A company may have too many employees, out-of-date machinery, or ineffective procedures if its administrative expense ratio is higher than that of its rivals.
Although administrative expenses are a necessary component of operating a firm, they shouldn't be exorbitant or wasteful. A company can raise its profitability and competitiveness by keeping track of and managing its administrative costs.
