Operating costs are the expenses which are related to the operation of a
business, or to the operation of a device, component, piece of equipment or
facility. They are the cost of resources used by an organization just to maintain
its existence. Business operating costs
For a commercial enterprise, operating costs fall into two broad categories:
fixed costs, which are the same whether the operation is closed or running at
100% capacity. Fixed Costs include items such as the rent of the building. These
generally have to be paid regardless of what state the business is in.
variable costs, which may increase depending on whether more production is
done, and how it is done. Variable Costs include indirect overhead costs such as
Cell Phone Services, Computer Supplies, Credit Card Processing, Electrical use,
Express Mail, Janitorial Supplies, MRO, Office Products, Payroll
Services,Telecom, Uniforms, Utilities, or Waste Disposal etc.
Business overhead costs Overhead costs for a business are the
cost of resources used by an organization just to maintain its
existence. Overhead costs are usually measured in monetary terms, but
non-monetary overhead is possible in the form of time required to accomplish
tasks. Examples of overhead costs include:
payment of rent on the office space a business occupies
cost of electricity for the office lights
some office personnel wages Non-overhead costs are incremental
costs, such as the cost of raw materials used in the goods a business sells.
Operating Cost is calculated by Cost of goods sold - Operating Expenses.
Operating Expenses consist of : Administrative and office expenses like
rent, salaries, to staff, insurance, directors fees etc.
Selling and distribution expenses like advertisement, salaries of salesmen.
It includes all operating cost such as salary, rent, stationery, furniture etc.
Equipment operating costs In the case of a device, component,
piece of equipment or facility, it is the regular, usual and customary
recurring costs of operating the equipment. This does not include the
capital cost of constructing or purchasing the equipment.
Operating costs are incurred by all equipment — unless the equipment has no
cost to operate, requires no personnel or space and never wears out. In some
cases, equipment may appear to have low or no operating cost because either the
cost is not recognized or is being absorbed in whole or part by the cost of
something else. Equipment operating costs may include:
Salaries or Wages of personnel Advertising
Raw materials License or equivalent fees imposed by a
government Real estate expenses, including
Rent or Lease payments Office space rent
furniture and equipment investment value of the funds used to
purchase the land, if it is owned instead of rented or leased
property taxes and equivalent assessments
Operations taxes, such as fees assessed on transportation carriers for use of
highways Fuel costs such as power for operations,
fuel for production Public Utilities such as telephone
service, Internet connectivity, etc. Maintenance of equipment
Office supplies and consumables Insurance premium
Depreciation of equipment and eventual replacement costs
Damage due to uninsured losses, accident, sabotage, negligence,
terrorism and routine wear and tear. Taxes on production or operation
Income taxes Some of these are not applicable in all
instances. For example, A solar panel placed on one's home for
use in generating electric power generally has only capital costs; once
it's running there are no personnel costs, utility costs or depreciation and
it uses no extra land so it has no real operating costs; however there may need
to be taken into account costs of replacement if damaged.
An automobile or any other item purchased for personal use has no salary
cost because the owner does not charge themselves for operating the device.
An item which is leased may have some or all of these costs included as part of
the purchase price. It might be questionable to assert that
the cost of ten extra people on the sales force are an incremental cost or
an overhead cost, since the wages for these people are both overhead and
incremental. The staff needed to keep the shop operational are mostly
considered overhead. formula for operating cost = total cost*
number of weeks References
SP Gupta, Ajay Sharma, Satish Ahuja. Cost Accounting. FK Publications. pg.
316