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What are Operating Costs?

By Felicia Dye
Updated May 17, 2024
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Operating costs are expenses that relate to a business’ operations. It can also refer to the costs of operating a specific device or branch of a corporation. These costs usually fall into two categories, called fixed costs and variable costs, and a business may have more of one type than the other.

Fixed operating costs are expenses that tend to remain the same whether the business or device is inactive or operating at full capacity. Examples of such expenses include employee salaries and machinery leasing fees. Salaries must be differentiated from hourly wages in this regard.

Flexible expenditures are known as variable operating costs. These expenses fluctuate based on a variety of factors. Money dispensed on hourly wages, for example, can be adjusted by varying the amount of time recipients are engaged in labor.

Operating costs are not unique to any country, although actual expenses may vary from one country to another or even from one location to another. Within an industry, it is very possible for expenses to vary. It is, however, difficult to find a business that does not have any of these costs. Even Internet businesses, in which the costs of operations can often be reduced, it is almost impossible to completely eliminate them.

The calculation of operating costs is considered essential to sound business planning. When these costs are not properly budgeted, a business can be adversely affected. Lack of planning increases the risk that a business will not maintain adequate funds to operate properly.

Since some costs are fixed, possible business interruptions or economic declines should be taken into consideration. These commitments generally cannot be deferred until a business finds it convenient to pay them. Fixed operating costs are normally set on a payment schedule and need to be paid accordingly for the company to maintain good credit.

Within the category of variable operating costs are expenses that are incurred only occasionally. Property maintenance and equipment repair are prime examples of this. These expenses can be very difficult to speculate, so a business adviser or consultant may be employed for such tasks. Many businesses also find it beneficial to maintain a budget for incidental expenses.

Start-up expenses are generally not calculated into operational costs. Expenditures related to starting a business, such as registration of a corporation’s name, are usually paid only once. Other start-up costs, such as equipment installation fees, may be recurring, but payments are usually completed by the time the business begins operating.

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Discussion Comments

By anon178902 — On May 22, 2011

Why is it important to keep the cost of operating an organization to a minimum? How large is the share of staffing costs in an organization?

By mooser — On Feb 09, 2011

The idea of fixed operating costs can be demonstrated in an example using hotel or airplane operating costs. This is what allows such luxuries as very cheap hotel rooms and airplane tickets. Grabbing a room or airline seat that is empty at the last minute can be a great way to get a discount. The hotel or airline is willing to let it got for less than what it costs to have it filled in order to get at least something to go toward the fixed costs. These will be there whether or not the room is rented or the seat is filled. Any amount they get toward the room or seat will at least reduce operating costs, even if it does not cover all of the variable costs associated with it.

By ryan08 — On Jan 25, 2011

You have to be really careful with those operating costs -- when I was first starting my business I got into the habit of putting little things like my morning coffee or lunch on my operating account, and that went downhill fast.

Luckily, I was able to keep the business going after a stern talking to by my accountant, but it could have easily gone the other way, so make sure you don't make the same mistakes I did!

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