Administration Overhead | Overheads Accounting

The below mentioned article provides a note on administration overhead.

According to ICMA Terminology, Administrative overhead is defined as “the sum of those costs of general management and of secretarial accounting and administrative services, which cannot be directly related to the production, marketing, research or development functions of the enterprise.”

The administration cost is incurred for carrying the administrative function of the organization i.e., cost of policy formulation and its implementation to attain the objectives of the organization and to control the operations of the undertaking. These costs are not directly related to production activity or function.

The administration costs may include the following:

(a) Office rent, rates and taxes,

(b) Office lighting, heating and cleaning,

(c) Depreciation, insurance, repairs and maintenance of office buildings, furniture, equipment and fittings,

(d) Salaries of administrative staff,

(e) Printing and stationery, postage and telegrams, telephones etc., and 

(f) Accounts and secretariat costs,

(g) Audit and legal fees,

(h) Bank charges,

(i) Salaries to office staff, and 

(j) Directors remuneration and sitting fees.

The representative types of administration overheads and their basis of apportionment is given below:

Type of overhead:

1. Office rent, rates and taxes,

2. Repairs and depreciation of factory buildings,

3. Office lighting, heating and cleaning,

4. Depreciation, insurance, repairs and maintenance of office building, furniture, equipment and fittings,

5. Salaries of administrative staff,

6. Remuneration of whole time director,

7. General administration expenses, and 

8. Audit fee.

Basis of apportionment:

1. Floor area occupied by each department,

2. Floor area occupied by each department,

3. Number of light points, area occupied, meter readings of different departments,

4. Book value or original cost of asset,

5. Number of employees of different departments,

6. Depending on time spent for different departments,

7. Works cost, and 

8. Sales or total cost.

Treatment of Administrative Overheads in Cost Accounting:

The administrative overheads may be treated in Cost accounts by adopting the following methods:

1. Charge to costing profit and loss account:

This method suggest to transfer the adminis­trative overhead to Costing Profit and Loss Account by treating them as fixed cost incurred in relation to formulation of policy and control of the undertaking.

2. Apportionment between production and selling and distribution overheads:

This method suggest to divide the administrative overheads in between production and selling distribu­tion activity on some equitable basis. It is assumed that administrative overheads are incurred for both production and selling and distribution.

3. Treat as separate element of cost:

This method considers the administrative overheads as a distinct and identifiable operation of the organization necessary to carry on its activity. This method suggest to recover administrative overheads on some equitable basis, which will also form part of cost of production.