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Definition
Operating costs, often referred to as “operational expenses”, are the ongoing expenses that a business incurs in order to maintain its day-to-day operations.
What are operation costs?
Operating costs encompass a wide range of expenditures necessary for the regular functioning of a business. This includes costs associated with production, administration, sales and marketing, research and development, and other activities central to the core operations.
Categories of operating costs:
- Direct costs (variable costs): These are expenses directly tied to the production or provision of goods or services. They tend to vary with the level of production.
- Indirect costs (fixed costs): These are expenses that are not directly linked to the production of a specific product or service. They exist regardless of the level of production and are necessary for the general operation of the business.
- Semi-variable costs: These costs have elements of both variable and fixed costs.
Operating costs are a crucial component in financial statements and performance metrics. They impact metrics like gross profit margin, operating profit margin, and net profit margin, which provide insights into a company’s profitability and efficiency.
Example of operating costs
A small bakery incurs various operating costs to produce and sell its goods. These costs may include:
- Rent for the bakery premises.
- Wages for bakers and other staff.
- Cost of ingredients such as flour, sugar, and butter.
- Utility bills for electricity, water, and gas.
- Packaging materials for products.
- Maintenance and repair costs for equipment like ovens and mixers.
- Marketing and advertising expenses.
- Insurance premiums for liability coverage.
These operating costs are essential for the bakery to run its day-to-day operations and generate revenue from selling baked goods.
