Administrative Overheads

Normally cost accounting is focused on production or manufacturing cost. But administration and the expenses incurred on that is equally important. Without administration whatever produced cannot be sold in the market. All planning and controlling of any organization is dependent upon the administration. And this administration expenses are normally in the nature of indirect cost.

Administrative overheads, termed administration costs by some accountants, are mainly in the nature of indirect costs and refer to all expenditure incurred in formulating the policy, directing the organization and controlling the operation of an undertaking which is not directly related to research and development, production, distribution and selling activity functions.¹⁰

Some examples of administrative overheads are as follows:

Accounts office expenses, audit fees, bank charges, depreciation of office building and equipment, legal expenses, stationery, telegram and telephone, internet expenses, etc.

Table : 4.5

Table Showing Proportion of Administrative Overheads to Total Cost of Pharmaceutical Companies under Study [in percentage]

(Source: Annual Reports of Companies from the year 1997-98 to 2004-05)

From the above Table no. 4.5 it is evident that proportion of administration overheads to Total cost for Aurobindo Pharma lies in between 6.05(2004-05) and 2.04(97-98) with an average of 3.44 is lower than overall average of 9.06 for the same period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for Cadila Healthcare lies in between 25.27(2003-04) and 11.92(1999-2000) with an average of 15.79 which is higher than overall average of 9.06 for the same period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for Cipla Ltd. lies in between 7.15 (2004-05) and 4.21(2000-01) with an average of 5.74 which lower than overall average of 9.06 for the same period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for Dr. Reddy’s Laboratories lies between 25.74(2004-05) and 8.86(97-98) with an average of 16.37 which is very high as compared to the overall average of 9.06 for the same study period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for IPCA lies between 9.78(2004-05) and 6.94(97-98) with an average of 8.18 which is low as compared to the overall average of 9.06 for the same study period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for Matrix Laboratories lies between 9.84(2004-05) and 2.3(97-98) with

an average of 5.20 which is low as compared to the overall average of 9.06 for the same study period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for Nicholas Piramal lies between 13.13(2000-01) and 6.94(2001-02) with an average of 10.68 which is high as compared to the overall average of 9.06 for the same study period.

From the above Table no. 4.5 it is evident that proportion of administration overheads to total cost for Sun Pharmaceuticals lies between 9.53(2004-05) and 5.94(98-99) with an average of 7.14 which is low as compared to the overall average of 9.06 for the same study period.

F – Test (ANOVA) Analysis

In order to establish relationship in the ratio of administrative overheads to total cost among different pharmaceutical companies under study during the study period and for establishing relationship in the ratio of administrative overheads to total cost among different years for each (individual) company, F-Test ANOVA is used. The statements of hypothesis for the comparison among different companies and for comparison among different years for individual companies during the study period are as under:

Hypothesis for comparison between different companies:-

Null Hypothesis (H₀):- “The ratio of administrative overheads to total cost between different companies under study during the study period is same.”

Alternate Hypothesis (H1):- “The ratio of administrative overheads to total cost between different companies under study during the study period is not same.”

Hypothesis for comparison between different years:-

Null Hypothesis (H0):- “The ratio of administrative overheads to total cost between different years during the study period in each company under study is same.”

Alternate Hypothesis (H1):- “The ratio of administrative overheads to total cost between different years during the study period in each company under study is not same.”

In the following Table 4.5(a) the calculation of F Test (ANOVA) is shown of Administrative Overheads to Total Cost ratio for the Pharmaceutical Companies under study, during the study period.

Table : 4.5(a)

Table showing calculation of F-Test (ANOVA)

S V d f S. S. M. S. S. F cal

Between

Companies 7 1306.624119 186.6605884 27.5723452

Between

Years 7 238.3926688 34.05609554 5.030555354

Error 49 331.7225563 6.769848087

Total 63 1876.739344

The above Table 4.5(a) shows the F value of 27.57 at 5% level of significance and at (7,49) degree of freedom for different pharmaceutical companies under study during the study period which is greater than the table value of 2.16 hence the null hypothesis is rejected and the alternate hypothesis is accepted, which means that there is a significant difference among the different companies under study in the ratio of administrative overheads to total cost. F value of 5.03 at 5% level of significance and at (7,49) degree of freedom is also greater than the Table value of 2.16 hence null hypothesis is rejected and alternate hypothesis is accepted, which means that there is a significant difference between different years’ ratios for all the individual companies.

Hence it can be concluded that there is a significant difference in the administrative overheads to total cost ratio among different companies under study and there is a significant difference in the administrative overheads to total cost ratio between different years of each company.