The primary types of operating expenses include payments that are related to compensation, sales and marketing, office supplies and non-facility fees.
Most Common Expenses
An operating expense tied to compensation could include pension plan contributions, sales commissions or benefits, and pay for non-production employees. This could be anything from hiring a freelancer, needing a plumber for those broken pipes or needing a Certified Public Accountant (CPA) to remedy the books.
Sales and marketing departments often accrue different operating expenses such as costs for advertising, sales materials, travel, direct mailings and entertainment provided for clients and customers. Some of these costs are infamously ballooned especially those like hotel bills, expensive dinners out, and first-class plane tickets. Executives are known to abuse the privilege of an expense account, which is why many businesses have accountants who are responsible for controlling those who have a heavy hand with the company credit card.
Different operating expenses accrued for a typical office may include accounting expenditures, insurance costs, payments for property taxes and utilities, repair and rental fees for non-production facilities, office supplies, and legal fees. These costs are not entirely unexpected and are often considered when planning the budget for the next year.
Cost of Goods Sold
Some companies also include the costs of goods sold (COGS) as an operating expense. For example, direct labor or rent for production facilities may be classified as different types of operating expenses. In addition, compensation and benefits for production personnel and direct labor may be classified under operating expenses for accounting purposes. When considering the COGS, a company may consider the cost of direct materials, repairs of facilities and equipment and property taxes on production facilities as an expenditure classified as an operating expense.
Companies that do this do so because they believe that expanding their year-end operating budget might secure the excess funding they need for the next year. These type of expenses are better listed in a separate section than under the general umbrella of operating expenses, although many companies still operate this way.
Operating vs. Administrative Expense
The primary difference between an operating expense and an administrative expense is that types of operating expenses are related to the departments that produce products and services whereas administrative expenses are more general and not necessarily specific to a department within the company. For example, employees such as receptionists or secretaries may be compensated as part of administrative expenses. Postage, telephone bills and general office supplies shared by all departments also typically are not classified as operating expenses. Instead, these general expenses are considered administrative costs.
The Bottom Line
While operating expenses can be incredibly diverse and far-ranging, the most common instances of them affecting the bottom line are with outside wage payments, cost of goods sold and for business expenditures that are required to secure new business. It is nearly impossible to calculate operating expenses for large multinational groups, but projections are often made when it comes time to line up budgets for the next fiscal year.