Operating Expense
The Costs of Running a Business Beyond Direct Production
Operating expenses (often called SG&A, for selling, general and administrative expenses) are the ongoing costs of running a business that are not directly related to producing the goods or services the company sells. In other words, these are the day-to-day “costs of doing business” - such as rent, utilities, marketing, and administrative salaries - that a company incurs to keep its operations running, but which are not part of the cost of goods sold. On an income statement, operating expenses are usually listed after the cost of goods sold (COGS) and are subtracted from gross profit to determine the firm’s operating income. Because these expenses support the business overall rather than any single product, they are often referred to as overhead or indirect costs.
Common Operating Expense Categories
Operating expenses can be grouped into several common categories. The main ones are selling expenses, general and administrative (G&A) expenses, and (for many companies) research and development (R&D) expenses. Here are examples of each category:
- Selling and Marketing Expenses: Costs related to selling the product or service and reaching customers. This includes expenses like advertising campaigns, sales promotions, marketing materials, sales staff salaries and commissions, as well as distribution and shipping costs.
- General and Administrative (G&A) Expenses: General overhead costs needed to run the company’s day-to-day operations. These include things like office rent, utilities (electricity, water, internet), office supplies, insurance premiums, and salaries of administrative and management personnel (e.g. accounting, HR, executives).
- Research and Development (R&D) Expenses: Money spent on developing new products, services, or technologies. Not every business has R&D costs, but for those that do (such as tech or pharmaceutical companies), R&D is considered an operating expense. For example, in one quarter Apple Inc. reported about $7.8 billion in R&D costs and $6.5 billion in SG&A; both were part of its total operating expenses.
Essentially, any expense that keeps the business running but isn’t a direct material or labor cost of producing goods would fall under operating expenses.
Distinguishing Operating Expenses from Other Costs
Operating Expenses vs. Cost of Goods Sold (COGS)
- It’s important to distinguish operating expenses from the cost of goods sold (COGS). Cost of Goods Sold refers to the direct costs of producing the goods or services a company sells, including expenses like raw materials, parts, and direct manufacturing labor. These costs are subtracted from revenue to calculate gross profit.
- Operating Expenses are the indirect costs of running the business that are not included in COGS. They cover all other expenses required to keep the business operating day-to-day, such as rent, marketing, and salaries of non-production employees. Operating expenses are subtracted from gross profit to calculate operating income.
In summary, COGS represents “what it costs to make the product,” while operating expenses represent “what it costs to run the company” beyond production.
Operating Expenses vs. Non-Operating Expenses
- A company’s income statement also separates operating expenses from non-operating expenses. Non-Operating Expenses are costs unrelated to the company’s main business activities. These might be one-time or incidental expenses, with common examples including interest expense on debt, losses from the sale of assets, or lawsuit settlement costs. Non-operating items are listed below operating income to give a clearer view of core operational performance.
How Operating Expenses Determine Operating Income
After a company lists revenue and subtracts COGS to find its gross profit, all operating expenses are then deducted to arrive at operating income (also known as operating profit or EBIT - earnings before interest and taxes). Operating income measures the profit from a company’s normal operations, before any effects of financing or taxes.
Calculation Example
Key Takeaways
Operating expenses (OPEX) are the day-to-day costs of running a business that are not directly tied to production, often referred to as SG&A (selling, general & administrative) or overhead.
Key categories include selling/marketing expenses, general/administrative costs (like rent, salaries, utilities), and research & development (R&D).
Operating expenses are fundamentally different from the Cost of Goods Sold (COGS); COGS are direct costs to make a product, while OPEX are the indirect costs to run the company.
On the income statement, operating expenses are subtracted from Gross Profit to calculate Operating Income (or EBIT).
These expenses are also kept separate from non-operating expenses (like interest on debt) to provide a clear view of the profitability of a company's core business activities.
Operating Expense
The Costs of Running a Business Beyond Direct Production
Operating expenses (often called SG&A, for selling, general and administrative expenses) are the ongoing costs of running a business that are not directly related to producing the goods or services the company sells. In other words, these are the day-to-day “costs of doing business” - such as rent, utilities, marketing, and administrative salaries - that a company incurs to keep its operations running, but which are not part of the cost of goods sold. On an income statement, operating expenses are usually listed after the cost of goods sold (COGS) and are subtracted from gross profit to determine the firm’s operating income. Because these expenses support the business overall rather than any single product, they are often referred to as overhead or indirect costs.
Table of Contents
Common Operating Expense Categories
Operating expenses can be grouped into several common categories. The main ones are selling expenses, general and administrative (G&A) expenses, and (for many companies) research and development (R&D) expenses. Here are examples of each category:
- Selling and Marketing Expenses: Costs related to selling the product or service and reaching customers. This includes expenses like advertising campaigns, sales promotions, marketing materials, sales staff salaries and commissions, as well as distribution and shipping costs.
- General and Administrative (G&A) Expenses: General overhead costs needed to run the company’s day-to-day operations. These include things like office rent, utilities (electricity, water, internet), office supplies, insurance premiums, and salaries of administrative and management personnel (e.g. accounting, HR, executives).
- Research and Development (R&D) Expenses: Money spent on developing new products, services, or technologies. Not every business has R&D costs, but for those that do (such as tech or pharmaceutical companies), R&D is considered an operating expense. For example, in one quarter Apple Inc. reported about $7.8 billion in R&D costs and $6.5 billion in SG&A; both were part of its total operating expenses.
Essentially, any expense that keeps the business running but isn’t a direct material or labor cost of producing goods would fall under operating expenses.
Distinguishing Operating Expenses from Other Costs
Operating Expenses vs. Cost of Goods Sold (COGS)
- It’s important to distinguish operating expenses from the cost of goods sold (COGS). Cost of Goods Sold refers to the direct costs of producing the goods or services a company sells, including expenses like raw materials, parts, and direct manufacturing labor. These costs are subtracted from revenue to calculate gross profit.
- Operating Expenses are the indirect costs of running the business that are not included in COGS. They cover all other expenses required to keep the business operating day-to-day, such as rent, marketing, and salaries of non-production employees. Operating expenses are subtracted from gross profit to calculate operating income.
In summary, COGS represents “what it costs to make the product,” while operating expenses represent “what it costs to run the company” beyond production.
Operating Expenses vs. Non-Operating Expenses
- A company’s income statement also separates operating expenses from non-operating expenses. Non-Operating Expenses are costs unrelated to the company’s main business activities. These might be one-time or incidental expenses, with common examples including interest expense on debt, losses from the sale of assets, or lawsuit settlement costs. Non-operating items are listed below operating income to give a clearer view of core operational performance.
How Operating Expenses Determine Operating Income
After a company lists revenue and subtracts COGS to find its gross profit, all operating expenses are then deducted to arrive at operating income (also known as operating profit or EBIT - earnings before interest and taxes). Operating income measures the profit from a company’s normal operations, before any effects of financing or taxes.
Calculation Example
Key Takeaways
Operating expenses (OPEX) are the day-to-day costs of running a business that are not directly tied to production, often referred to as SG&A (selling, general & administrative) or overhead.
Key categories include selling/marketing expenses, general/administrative costs (like rent, salaries, utilities), and research & development (R&D).
Operating expenses are fundamentally different from the Cost of Goods Sold (COGS); COGS are direct costs to make a product, while OPEX are the indirect costs to run the company.
On the income statement, operating expenses are subtracted from Gross Profit to calculate Operating Income (or EBIT).
These expenses are also kept separate from non-operating expenses (like interest on debt) to provide a clear view of the profitability of a company's core business activities.
Related Terms
Apply This Knowledge
Ready to put Operating Expense into practice? Use our tools to analyze your portfolio and explore market opportunities.
This content is also available on our main website for public access.