Operating Costs

This is the cost incurred in administering & maintaining a business on a day-to-day basis. It is the amount expended by a company just to maintain its existence.

Suppose Navya pays Rs.10,000 every month to the manager of each of the pizza outlets, Rs.2,000 every month as cleaning charges of each outlet, and Rs.5,000 towards other sundry expenses, then the operating expense of her company would come to Rs.41,000 every month (10,000 * 3 + 2000 * 3 + 5000). Hence, the total operating expense during the quarter was Rs.1,23,000 (41,000 * 3).

Just like in case of cost of revenue, companies that are able to either maintain or decrease their operating costs in relation to their sales are better.

In case of industrial and utility companies, operating expense is calculated as the sum of selling & general expenses, research & development costs, unusual expenses like restructuring charge & litigation expenses and any other operating expense resulting due to foreign currency adjustments, etc.

In case of insurance companies, the operating expense is calculated as the sum of selling & general expenses, unusual expenses like restructuring charge & litigation expenses and any other operating expense resulting due to foreign currency adjustments, etc.

In case of banks, loan loss provision is a part of the operating expense head. Loan loss provision refers to the provision created for the possible default on loans given out by the bank.