What Are Operating Expenses? Definition and Examples

Operating Expenses: Definition and Example

Not all of the costs a business incurs relate to running the business itself. These expenses, such as staff and advertising, are known as operating expenses. Businesses also have non-operating expenses and perhaps some non-operating revenue as well, such as the cost and possible income stemming from a lawsuit. When you prepare an income statement for a business, it is good accounting practice to distinguish between operating and non-operating expenses and list them separately. General expenses vary from covering rent on leased office space and utilities to office supplies and computer equipment.

Operating Expenses: Definition and Example

Often operating expenses receive the most scrutiny from a company, as these types of costs may be less fixed than their non-operating expenses, manufacturing costs and capital expenditures. It is entirely possible for a company to be running a sound operation and still incur unusual expenses that aren’t likely to recur. When you separate operating and non-operating expenses on the income statement, it allows managers and investors to better assess the actual performance of a business. The exception is the salaries involved in the production or manufacture of goods or services for sale. If you are thinking about investing in a company, you’ll want to look at its balance sheet and assess how well it might perform over time, based on a number of metrics. Operating costs can tell you a lot about a business, such as the level of product or service it offers and where it might be spending more or less than its competitors.

Example of income statement without total operating expenses

Operating costs are expenditures directly related to day-to-day business activities, excluding the processes involved in manufacturing a product or delivering a service. Examples include rent, travel, utilities, salaries, office supplies, maintenance and repairs, property taxes and depreciation . Many expenses, such as those for rent, utilities, and salaries, are fixed costs because they don’t tend to change every accounting period. But other items, such as selling expenses, for example, can be considered semi-variable costs because their costs are dependent on the volume of sales. Higher sales can lead to higher commission fees for some employees, while lower sales can translate to lower fees.

  • These expenses include items like payroll, rent, office supplies, utilities, marketing, insurance and taxes.
  • You can usually find industry benchmarks from industry associations, trade organizations, or your chamber of commerce.
  • The next step is to subtract COGS from sales to get the gross profit.
  • You can calculate the total variable cost of your business operations by multiplying the quantity of output with variable cost per unit of output.
  • Operating expenses can greatly impact the profitability of a business and how much cash it has.
  • Then, they are all added together to find the total operating expenses.

Knowing your operating expenses allows you to calculate your company’s operating expense ratio . The OER gives you a direct comparison of your expenses to your income so that you can compare your business to others in your industry. Variable costs, like the name implies, are comprised of costs that vary with production. Unlike fixed costs, variable costs increase as production increases and decrease as production decreases. Examples of variable costs include raw material costs and the cost of electricity.

Semi-Variable Costs

In that case, we say the company realizes increasing positive economies of scale. Operating expenses on an income statement are the costs that arise during the ordinary course of running a business. Operating costs include any costs a company must pay in order to stay in business. Fixed costs like rent and electricity are considered overhead costs because they can’t be avoided. Variable costs and semi-variable costs, on the other hand, can be monitored and managed to reduce spending. Operating expenses are costs tied to a company’s day-to-day operations. The thumb rule states that the lower a company’s OPEX, the more profitable the company is.

Operating Expenses: Definition and Example

A common technique is to identify operating expenses that are fixed costs (expenses like rent that don’t change based on the increase or decrease in a company’s daily activities) and variable costs . By minimizing https://simple-accounting.org/ fixed costs, management enables the company with a lower break-even goal to start making a profit. Operating expenses can greatly impact the profitability of a business and how much cash it has.

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Administrative expenses cover wages, salaries, and benefits such as insurance and health care to non-sales employees. There are various components in operating expenses, and each company has its own set of standards, but the line items below are what generally appears on the income statement. While costs for selling, general, and administrative may be a standardized item for many companies, some may not list depreciation and amortization because those expenses may be small. An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure , is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves capex, and the annual paper, toner, power and maintenance costs represents opex. For larger systems like businesses, opex may also include the cost of workers and facility expenses such as rent and utilities.

Operating Expenses: Definition and Example

The income statement shows the business operating costs and includes items such as sales, COGS, gross sales profit, other income, operating expenses, taxes, and net profit margin. The two main categories of expenses, COGS and operating expenses, are listed separately on an income statement. COGS are listed in the sales section of the income statement in order to calculate the gross sales profit. Operating expenses are listed in the expenses category of the income statement, usually in a section below sales.

What Is the Difference Between Operating & Non-Operating Expenses?

Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development. Operating expenses are categorized into marketing and administrative expenses. Marketing expenses include advertisements, sales salaries, business cards, and trade show booths.

  • Operating expenses are the costs a company incurs that are not related to the production of a product.
  • CAPEX depreciates over time, but OPEX is fully deductible in the same year.
  • The more the operating expenses are, the less cash the business keeps.
  • If the bakers still need to be paid even if no bread was produced, then it is considered an operating expense, but if bakers are only paid when bread is produced, then it is a non-operating expense.
  • It is a very popular ratio to use in real estate, such as with companies that rent out units.
  • Operating expenses reflect the operational activities, not the investing or financing activities of a company.

Fixed expenses can be found in the Sales, General, and Administrative (SG&A) section of the income statement. The return on investment of these costs is what indicates a company’s financial Operating Expenses: Definition and Example health. Making sure that expenses don’t run too high is a key part of having a business that makes a profit. However, it’s not the only route to profit that a company might take.

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