However, these expenses are part of daily decisions, and such financial performance based on OPEX can be regarded as a measure of managerial flexibility and competency, especially during a difficult economic scenario.Īlthough it is seen as a measure of financial performance, it is essential to note that it varies across industries, i.e., some industries tend to have higher operating expenses than others. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes. It is to be noted that several factors can impact this expense, which includes (not exhaustive) pricing strategy, raw materials price, labor cost Labor Cost Cost of labor is the remuneration paid in the form of wages and salaries to the employees. Operating profit = Net sales – COGS – Opex Net profit = Operating profit – Taxes paid – Interest expense read more or other costs of borrowing, one-time settlement, accounting adjustments, taxes paid, etc.
This category of expenses includes costs such as interest expense Interest Expense Interest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.
However, it is to be noted there are a few other expenses that are not included in the calculation of OPEX as it is considered unrelated to a company’s core operations.
EXPENSE DEFINITION HOW TO
You are free to use this image on your website, templates, etc, Please provide us with an attribution link How to Provide Attribution? Article Link to be Hyperlinked Read more, and the category comprises of inventory cost, freight expense, labor cost, factory overhead, etc. However, it excludes all the indirect expenses incurred by the company. – This expense can also include costs referred to as COGS (cost of goods sold) COGS (cost Of Goods Sold) The Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. This expense category is recognized as an operating expense in the income statement because it is not practically possible to operate the main business without incurring these expenses. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities. Management Expenses – It also includes costs such as management & staff compensation and other expenses Other Expenses Other expenses comprise all the non-operating costs incurred for the supporting business operations.Selling General and Admin Expenses (SG&A) – are usually regarded as “overhead.” The SG&A category includes expenses such as sales commissions, advertising, promotional materials, rent, utilities, telephone, research, and marketing.
They are easily available in the income statement and other costs subtracted from the operating income to determine net profit.įollowing are some of the common Operating Expenses – It does not include expenses such as the cost of goods sold directly related to product manufacturing or service delivery. Operating Expense (OPEX) is the cost incurred in the normal course of business.
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