Cost Accounting Standard-11 (CAS-11): Administrative Overheads – A Complete Guide

Introduction

Administrative overheads are a crucial component of cost accounting, covering indirect costs incurred for general business administration rather than direct production activities. Cost Accounting Standard-11 (CAS-11) establishes uniform principles for the identification, measurement, allocation, and reporting of these overheads to ensure accuracy and transparency in cost records.

In this article, we will explore:
✔ Definition and Scope of CAS-11
✔ Types of Administrative Overheads
✔ Methods of Allocation and Absorption
✔ Disclosure and Compliance Requirements
✔ Impact on Cost Accounting and Decision-Making

Let’s dive deeper into CAS-11 and its role in financial management.

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Definition of Administrative Overheads

According to CAS-11, Administrative Overheads refer to all indirect costs incurred for the general management and administration of an organization. These costs are not directly linked to production or sales but are essential for running a business efficiently.

These expenses include corporate office costs, salaries of management staff, IT and communication expenses, legal fees, and compliance costs.

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Scope of Cost Accounting Standard-11 (CAS-11)

CAS-11 applies to all organizations maintaining cost records as per statutory requirements. It is relevant for:

✔ Manufacturing Companies – Allocation of head office costs across departments.
✔ Service Organizations – Managing administrative expenses like HR, legal, and IT services.
✔ Project-Based Businesses – Distributing corporate office expenses across projects.
✔ Non-Profit and Government Entities – Proper classification of operational costs.

Administrative overheads must be identified and allocated properly to ensure accurate cost determination and compliance with cost audit standards.

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Types of Administrative Overheads

Administrative overheads can be classified into:

✔ Employee-Related Costs – Salaries of senior management, HR, finance, and legal teams.
✔ Office Expenses – Rent, maintenance, electricity, and security for administrative offices.
✔ IT and Communication Costs – Internet, software licenses, cybersecurity, and IT support.
✔ Professional Fees – Audit fees, legal expenses, and consulting charges.
✔ Depreciation and Amortization – Costs related to office buildings, furniture, and software.
✔ Corporate Governance Costs – Compliance with regulatory filings, board meetings, and statutory reporting.

These costs, though not directly tied to revenue generation, impact the operational efficiency and financial health of an organization.

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Measurement of Administrative Overheads

Administrative overheads are measured based on actual incurred costs, supported by proper documentation such as:

✔ Salary records for administrative staff
✔ Invoices for legal and consulting fees
✔ Utility bills and office rent agreements
✔ Depreciation schedules for office assets

While measuring these overheads, expenses related to sales, distribution, and production must be excluded to maintain accuracy in cost allocation.

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Assignment and Allocation of Administrative Overheads

Since administrative overheads benefit multiple departments, a systematic allocation method is required.

Methods of Allocation:

1. Percentage of Total Direct Costs – Allocating overheads in proportion to the total direct expenses of each department.
2. Revenue-Based Allocation – Distributing costs based on each department’s contribution to total revenue.
3. Headcount-Based Allocation – Assigning costs based on the number of employees in each division.
4. Floor Space Usage – If administrative overheads include office rent and facility expenses, allocation can be done based on office space occupied.

✔ Example: If a company incurs ₹10,00,000 in administrative overheads and allocates them based on direct costs, a division with 40% of the company’s direct costs will bear ₹4,00,000 of these expenses.

Proper allocation ensures fair distribution of costs and better financial reporting.

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Absorption of Administrative Overheads

After allocation, administrative overheads are absorbed into product or service costs. This can be done using:

✔ Per Unit Basis – Absorbing overheads into the cost of each unit produced.
✔ Per Hour Basis – Allocating based on machine hours or labor hours.
✔ Percentage of Prime Cost – Absorbing overheads as a percentage of direct costs.

Choosing the right absorption method depends on the nature of the business and industry practices.

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Disclosure and Compliance Requirements

CAS-11 mandates businesses to disclose administrative overheads separately in cost statements. Organizations must provide:

✔ Breakdown of administrative overheads (salaries, rent, IT costs, etc.).
✔ Methods used for allocation and absorption.
✔ Reasons for any exclusions or special treatments applied.

These disclosures ensure financial transparency and compliance with cost audit regulations.

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Impact of CAS-11 on Cost Accounting

1. Better Cost Control

Accurate identification and allocation of administrative overheads help in cost reduction and budgeting.

2. Improved Profitability Analysis

A clear understanding of administrative costs allows businesses to analyze profit margins accurately.

3. Regulatory Compliance

Following CAS-11 ensures standardized financial reporting, minimizing the risk of audit issues.

4. Smarter Decision-Making

With detailed cost data, organizations can optimize administrative expenses and allocate resources efficiently.

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Challenges in Implementing CAS-11

✔ Overlapping Expenses – Some costs, like IT and HR expenses, support multiple functions, making classification difficult.
✔ Complex Allocation Methods – Choosing the right basis for cost allocation can be challenging.
✔ Regulatory Compliance Issues – Businesses must ensure proper documentation for audits.

Solutions:

✔ Use cost-tracking software to monitor administrative expenses.
✔ Adopt industry-approved allocation methods for accuracy.
✔ Maintain proper financial records to support audit requirements.

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Frequently Asked Questions (FAQs)

1. What is the purpose of CAS-11 in cost accounting?

CAS-11 standardizes the classification, measurement, and allocation of administrative overheads to ensure accuracy in cost records and financial transparency.

2. How are administrative overheads allocated in cost accounting?

They can be allocated based on direct costs, revenue contribution, employee count, or office space occupied.

3. Why is the proper absorption of administrative overheads important?

It ensures that all indirect costs are fairly distributed across products, services, or departments, leading to accurate cost determination.

4. What are some common administrative overheads?

Common examples include corporate salaries, office rent, IT expenses, legal fees, and compliance costs.

5. How does CAS-11 help in cost audits?

It ensures proper documentation and classification of administrative expenses, making audits more efficient and compliant with statutory requirements.

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Conclusion

Cost Accounting Standard-11 (CAS-11) plays a critical role in ensuring standardized, transparent, and accurate cost allocation of administrative overheads. Proper classification and allocation help businesses optimize costs, enhance profitability, and comply with regulatory standards.