Operating expenditure, commonly known as operating costs or business overheads, encompasses the recurrent expenses associated with the day-to-day functioning of a business.
Routine operating costs may encompass expenditure on items such as logistics and freight, the procurement of raw materials, and compensation for personnel.
Fixed and variable operating costs
Operating costs are typically categorised into fixed and variable expenses. Variable costs are influenced by the levels of production and sales activity of the company—they fluctuate in direct proportion to business volume. On the other hand, fixed costs are relatively invariant, irrespective of the business’s output, and generally cover salaries, premises rental, utilities, and other ongoing charges.
Inclusion in financial statements
Operating costs is a part of the understanding of a business’s profit and loss and are detailed in the income statement (also known as the profit and loss statement). This financial report provides an account of a business’s total revenue and operating income, after deducting the cost of goods sold and operating expenses, coupled with any additional income from interest and less any interest expenses incurred.