Definition: Operating expenses (OPEX) are costs not directly associated with the production of the goods or services but commonly incurred during regular business activities. In other words, these are day-to-day expenses that cannot be classified as costs of producing the company’s goods or services or costs of purchasing assets.
What Does Operating Expenses Mean?
What is the definition of operating expenses? OPEX are costs incurred while developing regular business activities. Such expenses can vary widely depending on the industry and the nature of the business itself, but most of the operating expenses can be classified in these categories: rent, payroll, marketing, research, maintenance, subscriptions, utilities, legal fees, among others.
These expenses are normally listed separately in financial statements to determine the company’s operating profit, which is sometimes referred to as EBIT or EBITDA depending on the purpose of the calculation. They are normally classified under three big categories: administrative expenses, sells expenses, and general expenses.
Here’s a practical example.
Example
Flash Transportation LLC is a company that provides private transportation for top executives. This company is currently evaluating its accounting policies to increase the accuracy and relevance of its financial statements. As part of this process, the company is evaluating what they consider OPEX. There’s a discussion among the staff to classify them properly. How can they differentiate between what’s an operating expense and what isn’t?
As we discussed previously, operating expenses are:
- Not directly related with production costs
- Commonly incurred during regular business activities
In order to classify expenses correctly, the company must follow this concept. In the case of this business, maintenance expenses should not be considered OPEX. Given that the nature of the business, maintenance expenses are considered a cost of providing the services. Likewise, payroll expenses must be classified as costs of providing the services. Rent for the storage of the company vehicles, however, does not contribute directly to the production of the service. Thus, it is considered an operating expense.
Summary Definition
Define Operating Expenses: OPEX means costs associated with the core functions of a business.
