Administrative or nonmanufacturing overhead describes a client’s general business expenses that aren’t related to production, marketing, or research costs. They’re costs such as developing and carrying out general business policies, secretarial functions, accounting and legal services, and office-related business. The administrative overhead costs of a typical client can include items such as:
- Rents, taxes, and other expenses for office and administrative space
- Repairs, maintenance, depreciation, and other costs of office furniture and equipment
- Salaries and benefits for directors, accounting, legal and nonmanufacturing staff
- Office supplies
Some of your clients may lump together administrative overhead and manufacturing overhead as “all overhead.” Despite similarities, your clients should understand the differences. Small business owners usually need their accountants to help them learn which overhead costs are administrative, how to separate them from manufacturing overhead for bookkeeping, and why this is important.
Your clients should include administrative and manufacturing overhead for setting prices so all operating costs are covered and the products generate profits. They might also need your help to apportion these expenses when they make pricing decisions. Manufacturing overhead may be easier to allocate among products than administrative overhead, but you should probably explain why it’s important to use a consistent base for measuring profitability accurately. Manufacturing overhead tends to fluctuate, while administrative overhead is usually fixed.
When reports are for internal uses such as budgeting or setting selling prices, you can split administrative costs using whatever base your client feels gives it a profitable selling price that covers costs, as long as it applies the costs consistently. Your client may want to spread administrative overhead costs over the number of units produced, hours worked, or wages paid. But, these reports are for internal use only; you don’t want your client to confuse them with financial reports intended for the public or required by law.
When you prepare financial reports the law requires for publicly traded companies or for stockholders, explain to your client you have to show administrative overhead separately from production overhead. You can list administrative overhead as an expense on the income statement under a selling, general and administrative costs account, or as a separate entry. Under Generally Accepted Accounting Principles, administrative overhead is reported for the period the costs are incurred.