## Administrative Overheads – Definition
As per CIMA Terminology, administrative overheads are costs associated with general management, secretarial, accounting, and administrative services that cannot be directly linked to production, marketing, research, or development functions. They arise from:
- Formulating policies
- Directing the organisation
- Controlling operations
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## Methods of Accounting for Administrative Overheads
### (a) Apportion between Production and Sales Departments
- Recognises that both departments benefit from administration
- Drawback: Difficult to find suitable apportionment bases; increases clerical work; ignores finance and other departments
### (b) Charge to Profit & Loss Account
- Justification: Admin overheads are not directly production/sales-related and are largely fixed costs
- Drawback: Understates product costs – violates sound accounting principles
- Used when admin costs are immaterial or purely period costs
### (c) Treat as Separate Addition to Cost of Production/Sales (Recommended)
- Administration is treated as a separate function alongside production and selling
- Charged to cost of jobs/products as a distinct cost element
- Bases for apportionment: Works cost, sales value/quantity, gross profit on sales, quantity produced, or conversion cost
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## Control of Administrative Overheads
Admin overheads are mostly fixed and stem from management policies – hence difficult to control but not impossible.
### (i) Classification and Analysis
- Classify by administrative department and function
- Compare expenses with results achieved per department
- Compare overhead absorption rates across periods
- Benchmark service department costs against external alternatives
### (ii) Control through Budgets
- Prepare monthly/annual budgets for each administrative department
- Compare budgeted vs actual → investigate variances
- Assign responsibility for variances to relevant departments
### (iii) Control through Standards
- Set performance standards for each administrative activity
- Compare actual performance with standards
- Standards act as a performance yardstick enabling corrective action