Operating cost
From Wikipedia, the free encyclopedia
Operating costs are the recurring expenses which are related to the operation of a business, or a device, component, piece of equipment or facility.
In the case of a business, it is the amount of resources used by an organization just to maintain existence. also known as overhead or overhead cost. Overhead costs are usually measured in monetary terms, but non-monetary overhead is possible in the form of time required to accomplish tasks.
Examples of business process overhead include the payment of rent on the office space a business occupies, the electricity bill to power the lights in the office, and to some degree, the wages of the personnel working in that office.
Examples of non-overhead costs are incremental costs. These include the cost of supplies used to create the goods a business sells.
In the case of or a device, component, piece of equipment or facility (for the rest of this article, all of these type items will be referred to in general as equipment),it is the regular, usual and customary recurring costs, as opposed to the capital cost used to construct or purchase the equipment (depending on whether it is made by the owner or was purchased as a constructed system). Operating costs apply in general to all equipment unless the equipment has no cost to operate, requires no personnel or space and never wears out.
In some cases, equipment may appear to have low or no operating cost because either the cost is not recognized or is being absorbed in whole or part by the cost of something else.
For a commercial enterprise, operating costs fall into two broad categories:
- fixed costs, which are the same whether the operation is closed, or running at 100% of capacity
- variable costs, which may increase depending on whether more production is done, and how it is done (producing 100 items of product might require 10 days of normal time or take 7 days if overtime is used. It may be more or less expensive to use overtime production depending on whether faster production means the product can be more profitable).
In the case of equipment, operating costs vary depending on what it is, what it is used for, and what it does. These costs may include, but are not limited to:
- Salaries of personnel
- Advertising
- Raw materials
- License or equivalent fees (such as Corporation yearly registration fees) imposed by a government
- Real estate expenses, including
- Fuel costs such as power for operations, fuel for production
- Public Utilities such as telephone service, Internet connectivity, etc.
- Maintenance of equipment
- Office supplies and consumables
- Insurance
- Depreciation of equipment and eventual replacement costs (unless the facility has no moving parts it probably will wear out eventually)
- Damage due to uninsured losses, accident, sabotage, negligence, terrorism and routine wear-and-tear.
- Taxes on production or operation (such as subsidence fees imposed on oil wells)
- Income taxes
Some of these are not applicable. For example,
- A solar panel placed on one's home for use in generating electric power generally has only capital costs; once it's running there are no personnel costs, utility costs or depreciation and it uses no extra land (that wasn't already part of the place where it is located) so it has no real operating costs; however there may need to be taken into account costs of replacement if damaged.
- An automobile or any other item purchased for personal use has no salary cost (the owner does not charge themselves for operating the device)
- An item which is leased may have some or all of these costs included as part of the purchase price.
It might be questionable to assert that the cost of ten extra people on the sales force are an incremental cost or an overhead cost, since the wages for these people are both overhead and incremental. The staff needed to keep the shop operational are mostly considered as overhead.
