What is the meaning / definition of Administration Costs?
Administration costs, also known as overhead costs or fixed costs are the costs which incur on a business or hotel solely from running. These overhead costs are not directly impacted by manufacturing, production or sales volume and can therefore be described as fixed costs. They can be seen as the basic costs that occur without a sale having to be made. Examples for administrative costs are taxes, rent, insurance, licensing fees, utilities, accounting and legal teams, administrative staff, facility upkeep, etc.
On the contrary to these fixed costs stand the variable costs, which vary per product/ service sold.
How to calculate Administration costs?
Total Fixed Costs = Overhead costs
Add together all costs that are fixed costs - and you will receive the total amount of your overhead costs.
Keeping administration costs low is a priority among hotel owners. They want to see their profits grow which can only increase if administration costs are lower than gross profit. If administration costs are too high a hotel may be at risk of going bankrupt or accumulating debt. Hotels are notorious for having high fixed costs and low variable costs - they therefore are known to have a high operating leverage, as the variable costs that incurr per room sold (cleaning, refilling of mini bar etc.) are generally small in comparison to rent, equipment costs and staff.