operating expenses definition

Operating Expenses Definition and Examples

Operating Expenses Definition – “Expenses that are not directly attributed to manufacturing a product or delivering a service”.

In general terms, operating expenses are the expenses that business occurs during its normal course of of functioning. This does not includes any expenses that are directly attributable to the production and manufacturing process. Or the expenses incurs for the smooth functioning of the day to day operations of the business.

These expenses includes cost of goods sold, labor costs, rent, inventory expenses, insurance, salaries, etc. All the operating expenses appears on the Income statement. Managers always tries to reduce this cost. However, they should also keep in mind that they are easily able to compete with their competitors

Operating Expenses Example

In order to understand the operating expenses definition, let’s have a look over the examples of operating expenses.

  • Direct materials
  • Direct labor
  • Salaries to employees
  • Advertising costs
  • Mailing costs
  • Entertainment costs
  • Traveling costs
  • Repairs and maintenance costs
  • Insurance expenses
  • Office supplies
  • Property costs, etc.

Importance of Operating Expenses

It is very important from the business point of view. Operating expenses are used in calculating the operating income of the business. This operating income is very useful in finding various financial performance measures.

Lower the operating costs of the company, the higher the profit of the company. However, there are lots of companies which have higher operating costs. So, it is advisable to compare the companies within the industry. In addition to this, operating expenses are useful for the managers to make the decisions. At the same time, these costs also measures the managerial competency and flexibility.

Related Financial Terms of Operating Expenses