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Overview of Operating Costs
Definition of
Operating Costs
What are Operating Costs? Operating Costs are the ongoing expenses a business incurs to engage in its normal day-to-day business activities. These are costs that are not directly tied to the production of goods or services (which are typically part of the Cost of Goods Sold - COGS), but are necessary for the business to function. Examples include rent, utilities, salaries and wages for administrative and sales staff, marketing and advertising, insurance, and office supplies. Operating Costs are often used interchangeably with Operating Expenses (OPEX).
Activities Related to
Operating Costs
Here is a list of Operating Costs related activities:Â
Paying rent for office or retail space, Covering utility bills (electricity, water, internet), Managing payroll for administrative, sales, and marketing staff, Purchasing office supplies and equipment, Paying for insurance policies (e.g., general liability, property), Incurring marketing and advertising costs, Budgeting for these ongoing expenses, and Tracking these expenses to control spending and analyze operating income.
These are essential day-to-day expenses for running a business.
The Importance of
Operating Costs
Operating Costs are important for business owners to understand and manage because they represent a significant portion of a company's total expenditures and directly impact its profitability. By effectively monitoring and controlling operating costs, businesses can improve their Operating Income and overall financial health. These costs are deducted from Gross Profit to arrive at operating income on the Income Statement. Analyzing operating costs helps in identifying inefficiencies and areas for cost savings without necessarily impacting production quality or sales efforts.
Key Aspects of
Operating Costs
Day-to-Day Operational Expenses
Costs associated with the normal ongoing operations of a business, excluding direct production costs.
Distinct from COGS
Operating costs are not included in the Cost of Goods Sold (COGS); they are expenses incurred to support the business's ability to operate and sell.
Can Be Fixed or Variable
Some operating costs are fixed costs (e.g., rent), while others can be variable costs (e.g., sales commissions) or mixed costs.
Impact on Operating Income
They are subtracted from gross profit to calculate operating income on the income statement.
Concepts Related to
Operating Costs
Operating Costs are often used interchangeably with Operating Expenses (OPEX) and represent a major category of Expenses on the Income Statement. They are different from Cost of Goods Sold (COGS). Managing operating costs is crucial for achieving desired Operating Income and overall profitability. They can include Fixed Costs, Variable Costs, and Mixed Costs. Effective budget planning relies on accurate tracking of operating costs.
Operating Costs
in Action:
The Adventures of Coco and Cami
Coco and Cami realize that besides the cost of ingredients, they have other expenses like rent for their shops, utility bills, and marketing flyers to keep their businesses running.
Professor A explains that these are Operating Costs – the day-to-day expenses necessary to support their business activities, separate from the direct costs of making their sandwiches and coffee.