Administration Overhead | Meaning | Measures to Control

What is Administration Overhead?

Administration overhead is the indirect expenses incurred relating to the administration of a business concern. The administrative function covers the formulation of business policy, directing the organization, controlling the operations of an undertaking, activities of Board of Directors and Secretaries, Financial Accountants and Managers, Law Officers, Auditors, General Administrative Officers, Personnel Manager and the like. Generally, the administrative overhead is incurred for the benefit of the business organization as a whole.

What does administration overhead include?

The term administration overhead includes rent, rates and taxes of the administrative building, insurance of office, building, repairs and maintenance of administrative building, lighting, heating and cleaning of general office, repairs and maintenance of office furniture and equipment, depreciation of office building, traveling and conveyance, legal charges, salaries and allowances, audit fees, meeting expenses, subscriptions, transport expenses, postage, telephone and telegram, telex, stationery, personnel department expenses, correspondence, typing, filing, Director’s remuneration, bank charges and the like.

The administration overhead is collected through the cost account numbers.

Measures to Control Administration Overhead

The size of administration overhead is fully depending upon the decision of the management. The control of administration overhead is very difficult because administration overhead is not directly related to production and sales activities. Moreover, administration overhead is fixed in nature. Even though, the administration overhead may be controlled to some extent by taking any one of the following measures.

1. Recording of Achievement

The administration overhead can be controlled through recording the achievements of various divisions of administration. The administration may be divided into Pubic Relations, Finance, Rapport with Government Departments and other services. Complete details of expenses incurred for these divisions and accomplishments are also recorded and maintained. A periodical report should be sent to the top management for evaluation of achievement of each division. In this way, the size of administration overhead can be maintained, enlarged or curtailed.

2. Budgeting

A separate budget is prepared for administration overhead specifically just like Sales Budget. The top management can decide the size of administration overhead through budget. In this way, the amount earmarked for administration overhead is known well in advance. This is the maximum limit for administration overhead.

3. Use of Standards

A standard is fixed for the each item of expenses of administration overhead. For example: postage, Traveling expense, and courier service. For this purpose, administrative operations use standardized by application of a unit of measurement. The postal department fixes the postal charges on the basis of the weight of the letters, book post, parcel, registered post, printed matter etc. The same principle is applied in the courier service also. In this way, a unit of measure is identified and fixes the standard for each operation. Such attempts certainly lead to control the administration overhead to some extent.

It should be remembered that all administrative functions could not be standardized. But, possible administrative functions can be standardized to control the overhead.