What Are Business Administration Costs? What Do They Include? How Are They Regulated?

Vũ Khôi

Author at Wotech Electronics Blog

A business operates efficiently and grows well for many reasons, among which cost management is indispensable. So have you fully understood the basics of business administration costs? This article will explore every fundamental aspect of this work — from the definition, the contents, and how to account for them!

What are business administration costs?

Business administration costs are the sum of the expenses a business needs to manage and pay to keep its day-to-day operations running. This is critical work for a business because it underpins the functioning of the company's entire cost system. That is why so many managers care about how to manage costs well and cut them to optimize operations.

Regulations on business administration costs

Under Article 92, Account 642 — Administration expenses, the following regulations apply:

This account covers a company's general administrative expenses, such as management staff salaries; social insurance; health insurance; office materials expense, fixed asset depreciation, land rent, other taxes and fees, receivables provisions, and so on.

The expenses above are not counted for CIT purposes, but if full documentation and invoices exist and they are accounted for under the Accounting regime, they will be adjusted in the CIT finalization to increase the CIT payable.

This account is opened according to the regulated expense content. Depending on requirements, additional level-2 accounts may be opened under this account to represent administrative expenses in the business. At the end of the period, the accountant's task is to transfer the administrative expenses to the debit of account 911.

What do business administration costs include?

Before learning how to optimally manage costs in a business, we need to understand what business administration costs consist of. In accounting, administrative expenses are represented through account 642, which includes the items listed below:

• Management staff costs: This is the payment for personnel at the company's management level, including allowances, social insurance, salaries, and so on, accounted for through account 6421.

• Administrative materials costs: these are costs accounted for in account 6422, covering spending on materials for running the business, such as office supplies, tools, and so on.

• Office supplies costs: tools and items such as pens, paper, and the like, accounted for through account 6423.

• Fixed asset depreciation costs: this is the depreciation of fixed assets such as machinery and equipment, office premises, document storage warehouses, means of transport for work, production lines, machinery and equipment, etc., accounted for through account 6424.

• Taxes, fees, and charges: these can include license tax, land rent, and other fees and charges, represented through account 6425.

• Provision costs: this is the provision for doubtful receivables or payables provisions charged to production and business expenses, calculated through account 6426.

• Purchased services costs: spending on outside services supporting management work, such as patents, payments to subcontractors, etc., accounted for through account 6427.

• Other monetary costs: other expenses such as travel expenses, including transportation, accommodation, etc., accounted for through account 6428.

The meaning of setting business administration cost norms

• Managing a company's costs is the basis on which a business prepares its operating budget. Preparing that budget requires elements such as labor costs, which need standard working-hour norms, and raw materials, which need similar norms.

• It is the basis for obtaining timely information so managers can make the earliest decisions on product pricing, on accepting or rejecting orders, and on analyzing profitability.

• For each employee to take responsibility for using resources economically, standard cost norms are necessary.

Why business costs rise

Building standard norms is meticulous work, because it combines the expertise of the people involved — who are responsible for product price and quality. To do this job well, the person performing it needs plenty of experience and a certain understanding of management and professional processes. We will suggest a number of causes that affect business costs, helping accountants and managers clearly understand the mechanisms that influence administrative costs.

Causes of rising costs

• The business expands its scale, leading to higher staffing, premises, office, and fixed asset costs, etc.

• The business raises salaries and employee benefits thanks to business growth and added profit

• More expenses due to external factors

• Weak control by the accounting department leading to embezzlement of company funds

Causes of falling costs

• Cutting unnecessary expenses because profit has dropped or the business situation is unstable

• The business reviews and eliminates gaps in its management processes

Overall, many factors drive a company's costs up and down. However, the issue should be viewed objectively, because the conditions that raise or lower costs are not necessarily positive or negative signs. In addition, the company's departments must be well controlled to avoid cost increases unrelated to the organization's growth, such as embezzlement of funds.

How to manage costs effectively

To manage effectively, beyond knowing the causes affecting administrative costs, accountants need to master the procedures in order to manage the business as optimally as possible. Each company and industry will have its own effective ways of carrying out cost management. However, there are some common methods accountants rely on in their work:

Prepare a list of reasonable expenditures

To take the first step toward effective cost management, accountants need to build a reasonable, optimized spending list for the company's assets. With this method, the accounting department can clearly see how many assets the company owns and which items need to be added, replaced, or repaired. It also reveals which expenditures fall outside the budgeted costs or exceed them, so the business can enforce its norms strictly and effectively.

List of surcharge expenses

A surcharge is defined as additional charges attached to the main charge, such as surtaxes, and so on. With a list of surcharge expense types, a business can control and anticipate the spending that may arise in the organization's operations.

Determine reserve funds

For a business engaged in commerce and production, expenses cannot always stay within the previously proposed amount and the pre-listed items. There will be times with doubtful receivables or other payables. The business therefore needs to identify which items are bad debts and which need to be paid for upcoming activities, in order to balance and preserve the liquidity of its cash flow.

Use software to account for costs

• Accounting software can automatically consolidate costs incurred for each object, automatically allocate costs by object, and calculate product costs.

• It automatically updates product prices based on finished-goods warehouse receipt documents and automatically calculates the product price when goods begin leaving the warehouse.

• Acceptance testing work is also optimized by the software through automation.

With the article above, we hope readers have gained a detailed view of business management — from the definition to the regulations, the root causes, and effective management methods for a business. To gain more in-depth knowledge, readers can look into effective, well-priced tools for management support, or ask colleagues for experience to draw the most practical lessons and approaches for themselves.

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