What Is the Business Management Cost Norm? What Is a Reasonable Cost Ratio?

Vũ Khôi

Author at Wotech Electronics Blog

Fundamentally, revenue and expenses are the two most important components of a company's financial statements. Expenses are the outlays a business must pay to keep operations running. Business management expenses belong to the expense group, reflecting the spending that supports the company's management activities. Businesses need to identify the management expense account as well as its contents and how to book it. The business management cost norm is fundamentally always shifting, and depending on the actual situation, each business needs to set a reasonable management cost norm.

What Is the Business Management Cost Norm?

The business management cost norm is the company's stipulation of the level of spending required for business management activities. Business management expenses here are the total costs used for management activities such as HR management, production management, administrative management, or production and trading management. These are all costs a business is obligated to pay if it wants to keep operating. Each business will have a different management cost norm depending on its structure and type of activity. In addition, the norm changes from year to year based on needs, the market, and operations.

Types of Business Management Expenses

To determine the business management expense norm, accountants must first fully understand the content of the company's management expenses. In essence, the types of business management expenses under Circular 200 are regulated as follows:

• Management staff expenses: Costs payable to managers and employees, including salaries, bonuses, health insurance, social insurance, and union fees.

• Management materials expenses: Costs paid for tools and materials used in business management, or repair fees.

• Office supplies expenses: Costs paid for office supplies.

• Fixed asset depreciation expenses: Costs paid for offices, factories, and warehouses.

• Provision expenses: Costs set aside for estimated debts payable to parties serving the company's business management work.

• Taxes, fees, and charges: Costs paid to the state, such as land tax, business license tax, resource tax, special consumption tax, and so on.

• Purchased services expenses: Costs used for technology purchases and patents.

• Other expenses: Costs used for business trips, conferences, guest receptions, and more.

Accounting for Business Management Expenses

After identifying the required expense types, accountants must understand the accounting principles for business management expenses. Business management expenses belong to account 642 in the books. Under Circular 200, the business management expense report template is regulated as follows:

• The Debit side includes management expenses arising in the period and provisions for doubtful receivables and payables.

• The Credit side includes management expense write-downs and reversals of provisions for doubtful receivables and payables.

• Business management expense account 642 has no ending balance.

• Business management expenses are closed out to account 911.

In addition, not every expense with complete documentation counts as a legitimate deductible expense. A few expense types are capped for deduction purposes. Accounting staff need to know the caps on business management expenses to avoid violations.

• Fixed asset depreciation expenses: Businesses with efficient operations may apply accelerated depreciation but by no more than 2x. For passenger cars with 9 seats or fewer, only the portion under VND 1.6 billion may be counted as an expense.

• Salary expenses: A business may set up a salary provision fund but not exceeding 17% of the annual payroll. Additionally, if the business is operating at a loss, the full 17% may not be set aside.

After booking the accounts, the business should audit its business management expenses to review and reduce violations. Common errors businesses encounter include:

• Under- or over-recording expenses

• Booking to the wrong account

• Invalid documentation

• Recording expenses unrelated to management activities

• Booking late tax payment penalties as expenses

When performing the audit, the business needs to collect relevant materials such as the general ledger and supporting documents. It then builds an estimation model and reconciles and analyzes the figures in the books against the documents.

Why Do Business Management Expenses Change?

Business management expenses are considered variable costs rather than fixed costs. That means the management cost norm will change depending on business conditions, needs, and the market.

Causes of rising business management expenses

There are three main causes of rising business management expenses:

• The business is expanding its scale of operations, which drives up hiring, production, and facility costs.

• The business increases bonuses and allowances for managers and employees because targets were exceeded and profits were strong.

• Management expenses are running higher than normal. In this case, accountants need to scrutinize closely to prevent embezzlement of funds. If the rise in management expenses is inversely proportional to revenue, the business needs to conduct a review to find the cause.

Causes of falling business management expenses

Falling management expenses are mainly due to company policy or to losses forcing cost cuts. However, there are also cases where expenses fall while the business continues to operate normally. The cause may be the elimination of unnecessary management expenses, such as streamlining management processes and fixing gaps in the management chain. In this case, cutting management expenses is necessary to sustain efficient operations.

Budgeting Business Management Expenses

The business management expense budget provides information on management costs likely to arise during the budget period. Budgeting plays a guiding and directing role for management and trading activities. The business must set a reasonable management expense budget based on prior-year figures, projected revenue, and development policies. So what percentage of total revenue is a reasonable level for business management expenses? In essence, a reasonable business management expense ratio is 10%. The business management expense budget includes the following items:

• Estimated sales volume

• Variable management cost per unit

• Total variable management costs

• Fixed management costs

• Total management costs

• Non-cash expenses

• Cash management expenses

Conclusion

Business management expenses reflect the total spending on a company's management activities. The management cost norm is inherently a variable cost and will change depending on the company's operations and management. If the rise or fall in operating expenses is inversely proportional to revenue, the business needs to review and reassess the situation to identify the problem and prepare a budget for the next period. We hope our article has given you useful information about business administration!

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