Operating Cost

What Is an Operating Cost?

An operating cost is money a company spends to keep its normal business running from one period to the next. These costs are not tied directly to making a specific product, and they are not purchases of long-lived assets such as buildings or machinery. Common examples include rent for an office, salaries for administrative staff, electricity, insurance, marketing, software subscriptions and routine repairs.

How Operating Costs Work

Operating costs appear on the income statement and are subtracted from revenue to arrive at operating income. Companies often group them under headings such as "selling, general and administrative expenses." Because they recur, operating costs tend to be predictable, which helps managers plan budgets and helps investors judge how efficiently a business turns sales into profit.

Some operating costs are fixed, meaning they stay roughly the same whatever the sales volume, such as a lease payment. Others are variable and rise or fall with activity, such as shipping charges or sales commissions.

Why It Matters to Investors

Investors often look at operating costs relative to revenue to understand a company's cost structure. A business that keeps these expenses low compared with its sales may have more room to earn a profit, while a business with high fixed operating costs can see its profits swing sharply when sales change. Changes in operating costs over time can also signal whether management is controlling spending or facing pressure from rising prices.

Operating costs are different from cost of goods sold, which covers the direct cost of producing what a company sells, and from capital expenditure, which is spending on long-term assets. Both are reported separately, so comparing them helps give a fuller picture of a company's finances.