Operating Expenses: Definition, Formula & Examples

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  • 0:02 What Are Operating Expenses?
  • 0:45 Formula
  • 1:39 Examples
  • 2:00 Administrative Expenses
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Lesson Transcript
Instructor
Tara Schofield

Tara has a PhD in Marketing & Management

Expert Contributor
Steven Scalia

Steven completed a Graduate Degree is Chartered Accountancy at Concordia University. He has performed as Teacher's Assistant and Assistant Lecturer in University.

This lesson introduces the concept of operating expenses. It explains what operating expenses are and how they are calculated. Examples of operating expenses are included.

What Are Operating Expenses?

Operating expenses can greatly impact the profitability of a business and how much cash it has. Operating expenses are the costs a company incurs that are not related to the production of a product. These expenses include items like payroll, rent, office supplies, utilities, marketing, insurance and taxes. Operating expenses are essentially the costs to keep the business running.

The more the operating expenses are, the less cash the business keeps. Because operating expenses can be a substantial drain on company resources, controlling operating expenses is an important aspect of managing a financially healthy business.

Formula

Operating expenses are found on the income statement. Every company will have different expenses based on their operations. A basic example of an operating expenses formula is below.

Operating expenses = license fees + office expenses + legal fees + insurance + travel and vehicle expenses + salaries and wages + accounting expenses + maintenance and repairs + supplies + advertising + utilities + property taxes

While this is a short list of common operating expenses, every company will have operating expenses that are unique to its needs. These expenses would be added to the list of operating expenses on the income statement and calculated with the other costs.

Examples

Operating expenses are often divided into two categories: marketing and administrative. Marketing expenses are the costs of promoting products and services. Marketing expenses include items like business and stationery printing, sales salaries, commission expenses, trade show booths, advertising, brochure printing, direct marketing expense, television and radio advertising, and print advertising.

Administrative expenses are the necessary expenses that are incurred in the course of running a business and are not directly tied to a specific product or service.

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Additional Activities

Calculating Operating Expenses - A Business Case:

The business case below will help you practice identifying and calculating operating expenses.

You are an accounting clerk at Systems Meds Inc and your manager has just asked to ?come by his desk. "We have a listing of expenditures from the past week that has not yet been recorded in the general ledger. Since you are in charge of operating expenses, can you look over this listing and identify which of these are operating expenses and also compute the total operating expenses? I will take care of posting the summary journal entry later on."

The listing is provided below.

ItemAmount ($)
Pencils and other stationary24.05
Payroll processing fee64.85
Maintenance on corporate vehicles297.62
Interest charge on business loan248.95
Purchase of raw materials from suppliers753.69
Plane ticket for CEO to visit a distant warehouse862.35
Lawyer fees for consultation session on Tuesday475.32
Insurance policy purchased for next year1,425,36

Solution:

See below.

ItemAmount ($)Included?
Pencils and other stationery 24.05Yes
Payroll processing fee64.85Yes
Maintenance on corporate vehicles297.62Yes
Interest charge on business loanNILNo, interest expense is not included in operating expenses and is reported separately.
Purchase of raw materials from suppliersNILNo, the purchase of raw materials relates to inventory, not operating expenses
Plane ticket for CEO to visit a distant warehouse862.35Yes
Lawyer fees for consultation session on Tuesday475.32Yes
Insurance policy purchased for next yearNILNo, the insurance policy is for a subsequent period and thus is a prepaid expense.

We know that the following is a list of different types of operating expenses that a company may have. Although there can be other expenses beyond this list depending on the company, this gives you the accounting clerk a good reference point in order to fulfill the request of your boss:

Total operating expenses = license fees + office expenses + legal fees + insurance + travel and vehicle expenses + salaries and wages + accounting expenses + maintenance and repairs + supplies + advertising + utilities + property taxes

=$24.05+$64.85+$297.62+$862.35+$475.32

=$1,724.19

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