# Treatment of Administrative Overheads
Administrative overheads are indirect costs related to managing the organisation (e.g., office salaries, directors' fees, postage). Their treatment depends on how the organisation views the admin function.
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## Approach 1: Admin as a Separate Function (like Production and Sales)
Admin overheads are recovered using a separate rate:
| Absorption Method | Formula |
|---|---|
| % of Works Cost | (Total Admin OH / Total Works Cost) × 100 |
| % of Conversion Cost | (Total Admin OH / Total Conversion Cost) × 100 |
| % of Sales Value | (Total Admin OH / Total Sales Value) × 100 |
| % of Gross Profit | (Total Admin OH / Gross Profit) × 100 |
| Rate per Unit Produced | Total Admin OH / No. of units produced |
Works Cost = Prime Cost + Factory/Production OH
Conversion Cost = Direct Labour + Factory OH (excludes direct material)
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## Approach 2: Admin Solely Benefits Production & Sales
Admin OH lose their identity and are merged into:
- Production overheads, AND
- Selling & Distribution overheads
No separate admin absorption rate exists.
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## Approach 3: Admin Has No Direct Relationship with Production/Sales
Admin OH are treated as period costs → transferred directly to Costing P&L Account.
They are not absorbed into products at all.
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## Choosing the Approach
| Situation | Recommended Approach |
|---|---|
| Admin function is distinct and traceable | Approach 1 (separate rate) |
| Admin exists only to support production/sales | Approach 2 (merge) |
| Admin is a general overhead with no product link | Approach 3 (period cost) |