Operating expense

An operating expense, operating expenditure, operational expense, operational expenditure or Opex is an ongoing cost for running a product, business, or system.^[1] Its counterpart, a capital expenditure (Capex), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves Capex, and the annual paper, toner, power and maintenance costs represents Opex.^[2] For larger systems like businesses, Opex may also include the cost of workers and facility expenses such as rent and utilities.

In business, an operating expense is a day-to-day expense such as sales and administration, or research & development, as opposed to production, costs, and pricing. In short, this is the money the business spends in order to turn inventory into throughput.

On an income statement, "operating expenses" is the sum of a business's operating expenses for a period of time, such as a month or year.

In throughput accounting, the cost accounting aspect of the theory of constraints (TOC), operating expense is the money spent turning inventory into throughput.^[3] In TOC, operating expense is limited to costs that vary strictly with the quantity produced, like raw materials and purchased components. Everything else is a fixed cost, including labour (unless there is a regular and significant chance that workers will not work a full-time week when they report on their first day).

In a real estate context, operating expenses include costs associated with the operation and maintenance of an income-producing property.

Operating expenses include:

• accounting expenses
• license fees
• maintenance and repairs, such as snow removal, trash removal, janitorial service, pest control, and lawn care
• advertising
• office expenses
• supplies
• attorney fees and legal fees
• utilities, such as telephone
• insurance
• property management, including a resident manager
• property taxes
• travel and vehicle expenses

Travel expenses are defined as those incurred in the event of travel required for professional purposes.

For this purpose, “travel” is defined as the simultaneous absence from the residence and from the regular place of employment. It is prompted by professional or company purposes and likely does not concern the traveler’s private life, or concerns it only to a small degree. Travel expenses include travel costs and fares, accommodation expenses, and so-called additional expenses for meals.

• leasing commissions
• salary and wages

Other terms

Net sales = gross sales – (customer discounts, returns, and allowances)

Gross profit = net sales – cost of goods sold

Operating profit = gross profit – total operating expenses

Net profit = operating profit – taxes – interest

Net profit = net sales – cost of goods sold – operating expense – taxes – interest

See also

• Capital expenditure (Capex)
• Total cost of ownership (TCO)
• Capital budgeting
• Freight expense
• Operating cost
• Overhead (business)

References

1. David Maguire, The business benefits of GIS : an ROI approach, 1st ed. (Redlands Calif.: ESRI Press, 2008), http://roi.esri.com/. ISBN 978-1-58948-200-5
2. Aswath Damodaran, Applied Corporate Finance: A User’s Manual (John Wiley and Sons, 1999), http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AppldCF/derivn/ch5deriv.html. ISBN 978-0-471-33042-4
3. Goldratt, E. M., & Cox, J. "The Goal: A Process of Ongoing Improvement" (Rev. ed.). (1986)., p. 61.

Further reading

• Harry I. Wolk, James L. Dodd, Michael G. Tearney. Accounting Theory: Conceptual Issues in a Political and Economic Environment (2004). ISBN 0-324-18623-1.
• Angelico A. Groppelli, Ehsan Nikbakht. Finance (2000). ISBN 0-7641-1275-9.
• Barry J. Epstein, Eva K. Jermakowicz. Interpretation and Application of International Financial Reporting Standards (2007). ISBN 978-0-471-79823-1.
• Jan R. Williams, Susan F. Haka, Mark S. Bettner, Joseph V. Carcello. Financial & Managerial Accounting (2008). ISBN 978-0-07-299650-0.1
• Goldratt, E. M., & Cox, J. (1986). The Goal: A Process of Ongoing Improvement (Rev. ed.). ISBN 978-0-88427-178-9.