Posted in Finance, Accounting and Economics Terms, Total Reads: 365
Definition: Operating Expense
Operating expenses are expenses that a business incurs in carrying out its day to day activities that are not directly associated with the production of goods or services. It includes the costs associated with a company’s main operating activities like compensation related expenses, office or manufacturing unit related operating expenses, sales and marketing related operating expenses etc. These are also called as Selling and General Administrative expenses (SG&A).
Operating expense excludes interest expense and other non-recurring items (accounting adjustments and legal fee) and other expenses that are not directly related to the company’s core business operations. Also cost of goods sold (COGS) is usually taken as separate expense and not included in operating expense, since COGS varies directly with the number of goods sold whereas operating expenses are generally fixed. For e.g. If we consider the payroll for a marketing manager, secretary, accountant and a manufacturing worker, the payroll for the first three would come under operating expense but the salary for manufacturing worker would be directly proportionate to the number of goods produced and sold and hence it comes under COGS.
Since operating expenses decide the operating income, lower the operating expense the better for the company. When companies are unable to raise prices or lower the COGS, they try to improve the bottom line by cutting the operating expense such as R&D costs or laying off non-production staff. But these measures may affect the quality of the business operations resulting in the company losing its competitiveness.