Operating expense

Last updated

An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . [1] Its counterpart, a capital expenditure (capex), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves capex, and the annual paper, toner, power and maintenance costs represents opex. [2] For larger systems like businesses, opex may also include the cost of workers and facility expenses such as rent and utilities.

Contents

Overview

In business, an operating expense is a day-to-day expense such as sales and administration, or research & development, as opposed to production, costs, and pricing. In short, this is the money the business spends in order to turn inventory into throughput.

On an income statement, "operating expenses" is the sum of a business's operating expenses for a period of time, such as a month or year.

In throughput accounting, the cost accounting aspect of the theory of constraints (TOC), operating expense is the money spent turning inventory into throughput. [3] In TOC, operating expense is limited to costs that vary strictly with the quantity produced, like raw materials and purchased components. Everything else is a fixed cost, including labour (unless there is a regular and significant chance that workers will not work a full-time week when they report on their first day).

In a real estate context, operating expenses include costs associated with the operation and maintenance of an income-producing property.

Operating expenses include:

Travel expenses are defined as those incurred in the event of travel required for professional purposes.
For this purpose, “travel” is defined as the simultaneous absence from the residence and from the regular place of employment. It is prompted by professional or company purposes and likely does not concern the traveler’s private life, or concerns it only to a small degree. Travel expenses include travel costs and fares, accommodation expenses, and so-called additional expenses for meals.

See also

Related Research Articles

Eliyahu M. Goldratt

Eliyahu Moshe Goldratt was an Israeli business management guru. He was the originator of the Optimized Production Technique, the Theory of Constraints (TOC), the Thinking Processes, Drum-Buffer-Rope, Critical Chain Project Management (CCPM) and other TOC derived tools.

The thinking processes in Eliyahu M. Goldratt's theory of constraints are the five methods to enable the focused improvement of any cognitive system.

Expenditure is an outflow of money, or any form of fortune in general, to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses of dining, refreshments, a feast, etc.

Cost of goods sold

Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.

Depreciation Decrease in asset values, or the allocation of cost thereof

In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.

Tax deduction is a reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income. Tax deductions are a form of tax incentives, along with exemptions and credits. The difference between deductions, exemptions and credits is that deductions and exemptions both reduce taxable income, while credits reduce tax.

Income statement

An income statement or profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service. It is a management accounting concept that can be used in full cost accounting or even ecological economics where it includes social costs.

In corporate finance, free cash flow (FCF) or free cash flow to firm (FCFF) is a way of looking at a business's cash flow to see what is available for distribution among all the securities holders of a corporate entity. This may be useful to parties such as equity holders, debt holders, preferred stock holders, and convertible security holders when they want to see how much cash can be extracted from a company without causing issues to its operations.

Fixed cost

In accounting and economics, fixed costs, also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or rents being paid per month. This is in contrast to variable costs, which are volume-related and unknown at the beginning of the accounting year.

Throughput accounting

Throughput accounting (TA) is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor costing because it is cash focused and does not allocate all costs to products and services sold or provided by an enterprise. Considering the laws of variation, only costs that vary totally with units of output e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measure in the Theory of Constraints (TOC). It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the speed or rate at which throughput is generated by products and services with respect to an organization's constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations.

Net income Measure of the profitability of a business venture

In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.

Capital expenditure

Capital expenditure or capital expense is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof.

Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. In other words, it is the total cost needed to bring a project to a commercially operable status. Whether a particular cost is capital or not depend on many factors such as accounting, tax laws, and materiality.

Overhead (business)

In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit, unlike operating expenses such as raw material and labor. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward staff, heating and lighting expenses of factory, etc. Overheads are also a very important cost element along with direct materials and direct labor.

Under the U.S. tax code, businesses expenditures can be deducted from the total taxable income when filing income taxes if a taxpayer can show the funds were used for business-related activities, not personal or capital expenses. Capital expenditures either create cost basis or add to a preexisting cost basis and cannot be deducted in the year the taxpayer pays or incurs the expenditure.

Return on investment (ROI) or return on costs (ROC) is a ratio between net income and investment. A high ROI means the investment's gains compare favourably to its cost. As a performance measure, ROI is used to evaluate the efficiency of an investment or to compare the efficiencies of several different investments. In economic terms, it is one way of relating profits to capital invested.

Theory of constraints (TOC) is an engineering management technique used to evaluate a manageable procedure, identifying the largest constraint (bottleneck) and strategizing to reduce task time and maximise profit. It assists in determining what to change, when to change it, and how to cause the change. The theory was established by Dr. Eliyahu Goldratt through his 1984 bestselling novel The Goal. Since this time, TOC has continued to develop and evolve and is a primary management tool in the engineering industry. When Applying TOC, powerful tools are used to determine the constraint and reduce its effect on the procedure, including:

Constraints accounting is an accounting technique, much like throughput accounting, which focuses on ongoing improvement and implementation of the theory of constraints. It includes an explicit consideration of the role of constraints, a specification of throughput contribution effects, and the decoupling of throughput from operational expenses.

References

  1. David Maguire, The business benefits of GIS : an ROI approach, 1st ed. (Redlands Calif.: ESRI Press, 2008), http://roi.esri.com/. ISBN   978-1-58948-200-5
  2. Aswath Damodaran, Applied Corporate Finance: A User’s Manual (John Wiley and Sons, 1999), http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AppldCF/derivn/ch5deriv.html. ISBN   978-0-471-33042-4
  3. Goldratt, E. M., & Cox, J. "The Goal: A Process of Ongoing Improvement" (Rev. ed.). (1986)., p. 61.

Further reading