posted on 06-06-2019

Operating Cost

Updated October 1, 2019

What is Operating Cost?

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 Does Operating Cost Work?

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 Does Operating Cost Matter?

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