What is Administrative Overhead?

Administrative overhead is those costs not involved in the development or production of goods or services. This is essentially all overhead that is not included in manufacturing overhead. This can be a substantial proportion of all costs incurred in businesses that are not directly engaged in the production of goods. For example, a software development company will have a comparatively large amount of administrative overhead.

Examples of Administrative Overhead

Examples of administrative overhead costs are the costs of:

Front office and sales salaries, wages, and commissions
Office supplies
Outside legal and audit fees
Administration and sales office lease
Administration and sales utilities
Administration and sales telephones
Administration and sales travel and entertainment

Accounting for Administrative Overhead

Administrative overhead is classified as a period cost. This means that costs incurred within a reporting period are assumed to be directly associated with it, and so must be recognized in the period incurred. Thus, administrative overhead is not capitalized into the cost of inventory, and so does not carry forward into future periods as an asset.