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  Administration Overheads

Introduction Administration Overheads

The cost of running the administration of a firm is known as administration cost is. In order to understand more noticeably, let us understand the administrative functions of a business firm. Administrative functions include strategy and policy formulation, directing the organization in the direction of the objectives determined through the top management and controlling several operations of the organization. Although these functions are not directly associated to production, selling and distribution, they make possible these functions. The expenditure acquired for carrying out these functions is termed as 'Administration Overheads'. Instances of administrative overheads are general office expenses, printing and stationery, building, rent, legal charges, office lighting, audit fees, office salaries, insurance of office equipments, depreciation of office equipments and repairs of office areas and machinery, travelling expenses of office staff etc. The accounting treatment of administration overheads is provided below.

Treatment in Cost Accounts:

There are three techniques of treatment of administrative overheads in cost accounts.

I. Transfer to Costing Profit and Loss Account:

 Within this method, the administration overheads are treated like a period costs and are written off to the Costing Profit and Loss Account. So these costs are not charged to jobs or production units like they are not directly associated to the production but are generally concerned with formulating policy. Though the main objection against this method is that because of exclusion of administrative costs from the cost of jobs will understate the cost of jobs. Likewise one more analysis on this technique is that administrative is a significant function and therefore these costs should be charged to the cost units. They should include from costs on the ground of insufficiency of control.

II. Apportionment to manufacturing and selling divisions:

Within this technique, administration overheads are divided among manufacturing and selling divisions on some appropriate basis. The major logic behind this technique is that, several experts consider that there are only two functions of a business firm and these are selling and production and other functions such as administration are auxiliary functions. So the administration overheads should be mixed with manufacturing and selling divisions. The final effect of this technique is that the administration overheads lose its identity. The major criticism of this technique is that administration is an equivalently significant function of an undertaking and its merger along with other functions on some basis does not depict the accurate picture. Likewise as the administrative overhead lose its identity, it is hard to control the same.

III. Separate functional element of cost:

Within this technique, administration overhead is referred as separate charge to the cost to make and sell. The assumption within this technique is that administration is a separate function. Consequently, the cost of sales analysis sheet is ready to depict the manufacturing cost and is finally charged to the specific job or order.

Control of Administration Overheads

Administration overheads are mainly fixed in nature. They can also be known as 'policy cost' because they occur out of a policy. Because of these reasons, the administrative costs are set in nature and are not controllable. Though control on these costs can be exercised via preparation of budgets and make use of standard costing. A budget can be generated for these costs and actual costs can be compared with the budget. To control these overheads responsibility accounting principles can also be followed.

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