What Exactly Are Operating Expenses?

Operating expenses are the costs incurred to keep a firm running, such as salaries and office supplies. Cost of goods sold (materials, direct labour, manufacturing overhead) and capital expenditures are not included in operating expenses (larger expenses such as buildings or machines).

What Constitutes Operating Expenses?

Operating costs consist of

  1. Payroll for employees (excluding labour for manufacturing)
  2. Insurance License fees
  3. Marketing Research on Rent (including for social channels like Facebook)
  4. Accountancy costs
  5. Construction upkeep and repairs
  6. Office supplies
  7. Utilities
  8. Lawyer's fees
  9. Real estate property taxes
  10. Vehicle expenses
  11. Travel costs

Operating Expenses are reported on the income statement of a business.

What Does a Rise in Operating Costs Imply?

An increase in operating expenses reduces a company's profit. Typically, a corporation scrutinises its operational expenses the most, as these costs may be less fixed than its non-operating expenses, manufacturing costs, and capital expenditures.

Senior management may attempt to decrease operational expenses by outsourcing corporate functions or allowing some employees to work from home. This reduces the amount of actual office space required for personnel. Additionally, management may employ cost-cutting measures such as automating portions of the firm or reducing compensation for new hires.

What Are Non-Operating Costs?

A non-operating expense is one that is unrelated to the day-to-day operations or manufacturing of a business. They consist of charges for:

  1. Depreciation\sAmortization
  2. Bank fees (including interest charges)
  3. Litigation payments and related costs
  4. Foreign exchange costs
  5. Restructuring expenses
  6. Outdated inventory (products that can no longer be sold)

Are Operating Expenses Included in COGS?

No, operating expenses and cost of products sold are presented separately on the income statement of a business. This is due to the direct relationship between the cost of goods sold and the manufacture of a product, as opposed to daily activities.

Operating Expense Ratio

The operational expense ratio (OER) compares the operating expenses of a property to the income it generates. In real estates, such as with companies who rent out units, it is a popular ratio. A low OER indicates that fewer funds from income are spent on operating expenses.

OER can also be used to compare operating expenses between two properties. For example, if a corporation owns two identical facilities in Michigan with comparable outputs, but one plant's OER is 15% higher than the other, management should analyse the cause.

Are Wages/Salaries Operating Costs?

Administrative expenses, such as pay for full-time employees or hourly wages, are running expenses for a business. Labour costs are determined separately, under the cost of goods sold, and are not included in operating expenses.