Operating cost
Encyclopedia
Operating costs can be described as the expense
s which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.
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:
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.
of constructing or purchasing the equipment (depending on whether it is made by the owner or was purchased as a constructed system).
Operating costs are incurred by all equipment — unless the equipment has no cost to operate, requires no personnel or space and never wears out (any examples? perhaps intangibles, though not equpiment, per se). 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:
Some of these are not applicable in all instances. For example,
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 as overhead.
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
s which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.
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
- variable costs, which may increase depending on whether more production is done, and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable).
Business overhead costs
Overhead costs for a business are the cost of resourcesResource (project management)
In project management terminology, resources are required to carry out the project tasks. They can be people, equipment, facilities, funding, or anything else capable of definition required for the completion of a project activity. The lack of a resource will therefore be a constraint on the...
used by an organization
Organization
An organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...
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.
Equipment operating costs
In the case of a device, component, piece of equipment or facility (for the rest of this article, all of these items will be referred to in general as equipment), it is the regular, usual and customary recurring costs of operating the equipment. This does not include the capital costCapital cost
Capital costs are costs incurred on the purchase of land, buildings, construction and equipment to be used in the production of goods or the rendering of services, in other words, the total cost needed to bring a project to a commercially operable status. However, capital costs are not limited to...
of constructing or purchasing the equipment (depending on whether it is made by the owner or was purchased as a constructed system).
Operating costs are incurred by all equipment — unless the equipment has no cost to operate, requires no personnel or space and never wears out (any examples? perhaps intangibles, though not equpiment, per se). 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:
- SalariesSalaryA salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
or WageWageA wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...
s of personnel - AdvertisingAdvertisingAdvertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
- Raw materials
- License or equivalent fees (such as Corporation yearly registration fees) imposed by a government
- Real estate expenses, including
- RentRentingRenting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
or LeaseLeaseA lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
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
- Rent
- Fuel costs such as power for operations, fuel for production
- Public Utilities such as telephone service, InternetInternetThe Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
connectivity, etc. - Maintenance of equipment
- Office supplies and consumables
- Insurance premium
- Depreciation of equipment and eventual replacement costs (unless the facility has no moving parts it probably will wear out eventually)
- Damage due to uninsured losses, accidentAccidentAn accident or mishap is an unforeseen and unplanned event or circumstance, often with lack of intention or necessity. It implies a generally negative outcome which may have been avoided or prevented had circumstances leading up to the accident been recognized, and acted upon, prior to its...
, sabotageSabotageSabotage is a deliberate action aimed at weakening another entity through subversion, obstruction, disruption, or destruction. In a workplace setting, sabotage is the conscious withdrawal of efficiency generally directed at causing some change in workplace conditions. One who engages in sabotage is...
, negligenceNegligenceNegligence is a failure to exercise the care that a reasonably prudent person would exercise in like circumstances. The area of tort law known as negligence involves harm caused by carelessness, not intentional harm.According to Jay M...
, terrorismTerrorismTerrorism is the systematic use of terror, especially as a means of coercion. In the international community, however, terrorism has no universally agreed, legally binding, criminal law definition...
and routine wear and tearWear and tearWear and tear is damage that naturally and inevitably occurs as a result of normal wear or aging. It is used in a legal context for such areas as warranty contracts from manufacturers, which usually stipulate that damage due to wear and tear will not be covered.Wear and tear is a form of...
. - Taxes on production or operation (such as subsidence fees imposed on oil wells)
- 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 (that wasn't already part of the place where it is located) 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 leaseLeaseA lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
d 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 as overhead.