Operating expenses

Definition

Operating expenses are the costs required for a company to run its day-to-day operations, excluding the cost of goods sold. These expenses include items such as rent, utilities, salaries, and marketing.

5 Must Know Facts For Your Next Test

1. Operating expenses are listed on the income statement after gross profit but before operating income.
2. They do not include costs directly tied to production, which are categorized under cost of goods sold.
3. Common examples of operating expenses include administrative salaries, office supplies, and depreciation.
4. Operating expenses can be divided into selling expenses and general & administrative expenses.
5. Effective management of operating expenses is crucial for maintaining profitability in merchandising companies.

Review Questions

• Where are operating expenses listed on the income statement?
• What types of costs are excluded from operating expenses?
• How can operating expenses impact a company's profitability?

Related terms

Gross Profit:

The difference between sales revenue and the cost of goods sold.

Operating Income:

The profit realized from a business's normal operations after deducting operating expenses.

Selling Expenses:

Costs associated with the direct selling of products, such as advertising and sales commissions.