Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Operating Cost

What it is:

Operating costs are key components of operating income calculation (and operating income is a crucial component of many financial measures). Thus, the lower a company's operating costs are, the more profitable it generally is.

Several things can affect operating costs (such as pricing strategy, prices for raw materials or labor costs), but because these items directly relate to the day-to-day decisions managers make, financial measures based on operating expenses are also measures of managerial flexibility and competency, particularly during rough economic times.

It is also important to note that some industries have higher operating costs than others. This is why comparing operating costs or income is generally most meaningful among companies within the same industry, and the definition of "high" or "low" costs should be made within this context.

How it works (Example):

Operating costs are expenses associated with running a business's core operations on a daily basis. Common examples are cost of goods sold and labor costs. Operating costs typically exclude interest expense, nonrecurring items (such as accounting adjustments, legal judgments or one-time transactions), and other income statement items not directly related to a company's core business operations.

Why it Matters:

An operating cost is a day-to-day cost incurred in the normal course of business. These costs appear on the income statement.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...