As operating expenses and cost of goods differ?


Both operating expenses and cost of goods sold (cogs) are costs that companies incur when doing business. However, the expenses are divided into income.

Operating costs and cost to measure various ways in which resources are used in the process management of the company. In the statement of income in cost of sales and operating expenses are shown as a separate item deducted from total sales or revenue.

Operating Expenses

Operating costs or operating expenses are expenses that are not directly connected with the production of goods or services. Typically, selling, General and administrative expenses included in operating expenses as a separate line. Administrative expenses are expenses which are not directly associated with a product, such as overhead. Examples of operating expenses include:

  • Rental
  • Utilities,
  • Stationery,
  • Court costs,
  • Sales, marketing,
  • Wage
  • The cost of insurance.

The management of the company must keep operating costs under control without compromising the revenue and the company’s ability to compete with its competitors.

Enterprises have a few different costs that do not depend on the volume of sales they produce. For example, a coffee shop should continue to pay rent, utilities, and wage workers in their facilities, even if the customers do not buy any of their drinks. Operating costs are recurring costs that are not directly associated with the actual goods.

Cost of goods sold

The production cost is the direct cost associated with the production of goods and services of the company. Cogs excludes indirect expenses such as distribution costs and costs of sales.

Cogs represents the business expenses directly incurred due to the fact that the transactions took place. When a coffee shop sells coffee, this reflects the cost of a Cup of coffee sleeve, water, processed grains, etc.

Examples of screws include:

  • Labour is directly connected with the production,
  • Depreciation on production plant
  • Utilities associated with the production,
  • Direct materials needed for production of goods and services,
  • Taxes on production.

In the retail trade, the production cost would be inventory and goods purchased from the supplier or manufacturer.

Example operating expenses & cogs

Below is the income statement for J. C. penney company Inc. (JCP) from 2017 10K statement.

  • The upper panel shows that total revenue amounted to 12.5 billion dollars (rounded).
  • Under the invoice listed as a separate item in the amount of 8.1 billion.
  • The SG&a expenses were $ 3.5 billion.
  • Total operating expenses amounted to $ 12.4 billion.

Bottom Line

As a rule, if you want to know if the expense falls under cogs, ask; “is this expense was the cost, even if no sales were created?”

With a warehouse full of goods, cost of goods sold include all the money spent on creating products and bringing them to the warehouse. Operating expenses represent the day-to-day expenses necessary to keep the business running.

Wages can either be a charge depending on the complexity. Accounting, for example, may include a Secretary, accountant, marketing or cleaning workers who will be operating costs. However, the automatic conveyor will be directly connected with the production and probably will be included in the cost of goods sold.

Read more about the costs captured in the statement of profit and loss, please read fundamental analysis: the report on profits and losses.

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