Several types of expenses affect profits for a business including equipment costs, inventory and facilities costs. There are two main categories for all business expenses: operating expenses and overhead expenses. The costs that fall into each category depend on the nature of the business. Essentially, operating expenses are directly related to production, while overhead expenses are the costs to run the business.

Operating expenses include materials, labor and machinery used to make a product or deliver a service. For example, a soda bottler has the cost of aluminum for cans, machinery costs and labor costs. An easy way to determine the operating expenses for a particular business is to think about the costs that are eliminated by shutting down production for a period of time. For example, the soda bottler still has to pay the facility lease payments, but all costs related to the actual making of the soda cease.

Overhead expenses represent costs that are more static and relate to general business functions, such as paying accounting personnel and facility costs. In the scenario above with the soda bottler, the facility lease payments are still owed even if no current production takes place within the facility. Therefore, facility costs are overhead expenses. Likewise, the soda bottler still incurs other business expenses such as insurance and administrative and management salaries. Overhead expenses also include marketing and other expenses incurred to sell the product. For the soda bottler, this includes commercial ads, signage in retailer aisles and promotional costs. These costs still remain if production is shut down for a short period of time.

  1. Does gross profit include labor and overhead?

    Gross profit is a company's profit after subtracting the costs of producing the goods and services. Several costs impact ... Read Answer >>
  2. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
  3. What are the different types of operating expenses?

    Learn about the different types of operating expenses and how they impact companies. Some are fixed costs while others are ... Read Answer >>
  4. What are the most common operating expenses for an online business?

    Learn about the common expenses of online businesses and find out about some of the tax implications of new business expenses ... Read Answer >>
  5. What is the difference between cost and price?

    Cost is typically the expense incurred forĀ a product or service being sold by a company. Price is the amount a customer is ... Read Answer >>
  6. What is the difference between recurring and non-recurring general and administrative ...

    Understand the expenses involved in a company's general and administrative operating costs and the difference between recurring ... Read Answer >>
Related Articles
  1. Investing

    How Does Coca-Cola Actually Make Money? (KO)

    Learn how Coca-Cola makes money with a unique business model that includes company owned and franchised bottlers around the globe.
  2. Taxes

    How Soda Taxes Will Affect PepsiCo and Coca-Cola

    Discover how a soda tax could affect the Coca-Cola Company and Pepsico, Inc., and see how both companies have expanded their product offerings in response.
  3. Investing

    Sodastream Now Owns a Market Nobody Wants

    Sodastream International (NASDAQ: SODA) is indisputably the king of the hill again, but unfortunately, that hill is a piece of real estate nobody wants -- not even Sodastream. The decision by ...
  4. Investing

    The New Plan from Coca-Cola's New CEO

    A new CEO's bold moves include giving employees the OK to say Coke isn't their favorite soda brand.
  5. Investing

    Coca-Cola FEMSA Scraps Plans for US Operations

    With an eye toward Trump and exchange rates, the Mexican bottler will look beyond the US.
  6. Investing

    Pepsi (PEP) Gets Crafty with Soda: Will it Pop?

    Pepsi is getting crafty with the launch of its Stubborn Soda. Is it a recipe for success?
  7. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  8. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  9. Investing

    ETF Gross vs. Net Expense Ratios: How They Differ

    If you're going to invest in ETFs, you should know the intricacies of expense ratios.
  1. Overhead Rate

    Overhead rate is a cost added on to the direct costs of production ...
  2. Variable Overhead

    Variable overhead is the indirect cost of operating a business, ...
  3. Applied Overhead

    Applied overhead is a fixed charge assigned to a specific production ...
  4. Administrative Expenses

    Administrative expenses are the expenses that an organization ...
  5. Production Volume Variance

    The production volume variance measures the total amount of overhead ...
  6. Absorption Costing

    An absorption cost is part of the managerial accounting cost ...
Trading Center