how to calculate operating costs
the following formula and steps can be used to calculate the operating cost of a business you will find the information needed from the firm s income statement that is used to report the financial performance for the accounting period operating cost cost of goods sold operating expenses text operating cost text cost of goods sold text operating expenses operating cost cost of goods sold operating expensestypes of operating costswhile operating costs generally do not include capital outlays they can include many components of operating expenses such as operating costs will also include the cost of goods sold which are the expenses directly tied to the production of goods and services some of the costs include a business s operating costs are comprised of two components fixed costs and variable costs which differ in important ways fixed costsa fixed cost is one that does not change with an increase or decrease in sales or productivity and must be paid regardless of the company s activity or performance for example a manufacturing company must pay rent for factory space regardless of how much it is producing or earning while it can downsize and reduce the cost of its rent payments it cannot eliminate these costs and so they are considered to be fixed fixed costs generally include overhead costs insurance security and equipment fixed costs can help in achieving economies of scale as when many of a company s costs are fixed the company can make more profit per unit as it produces more units in this system fixed costs are spread out over the number of units produced making production more efficient as production increases by reducing the average per unit cost of production economies of scale can allow large companies to sell the same goods as smaller companies for lower prices the economies of scale principle can be limited in that fixed costs generally need to increase with certain benchmarks in production growth for example a manufacturing company that increases its rate of production over a specified period will eventually reach a point where it needs to increase the size of its factory space in order to accommodate the increased production of its products variable costsvariable costs like the name implies are comprised of costs that vary with production unlike fixed costs variable costs increase as production increases and decrease as production decreases examples of variable costs include raw material costs and the cost of electricity in order for a fast food restaurant chain that sells french fries to increase its fry sales for instance it will need to increase its purchase orders of potatoes from its supplier it s sometimes possible for a company to achieve a volume discount or price break when purchasing supplies in bulk wherein the seller agrees to slightly reduce the per unit cost in exchange for the buyer s agreement to regularly buy the supplies in large amounts as a result the agreement might diminish the correlation somewhat between an increase or decrease in production and an increase or decrease in the company s operating costs for example the fast food company may buy its potatoes at 0 50 per pound when it buys potatoes in amounts of less than 200 pounds however the potato supplier may offer the restaurant chain a price of 0 45 per pound when it buys potatoes in bulk amounts of 200 to 500 pounds volume discounts generally have a small impact on the correlation between production and variable costs and the trend otherwise remains the same typically companies with a high proportion of variable costs relative to fixed costs are considered to be less volatile as their profits are more dependent on the success of their sales in the same way the profitability and risk for the same companies are also easier to gauge semi variable costsin addition to fixed and variable costs it is also possible for a company s operating costs to be considered semi variable or semi fixed these costs represent a mixture of fixed and variable components and can be thought of as existing between fixed costs and variable costs semi variable costs vary in part with increases or decreases in production like variable costs but still exist when production is zero like fixed costs this is what primarily differentiates semi variable costs from fixed costs and variable costs an example of semi variable costs is overtime labor regular wages for workers are generally considered to be fixed costs as while a company s management can reduce the number of workers and paid work hours it will always need a workforce of some size to function overtime payments are often considered to be variable costs as the number of overtime hours that a company pays its workers will generally rise with increased production and drop with reduced production when wages are paid based on conditions of productivity allowing for overtime the cost has both fixed and variable components and is considered to be a semi variable cost real world example of operating costsbelow is the income statement for apple inc aapl for the year ending sept 25 2021 according to its annual 10 k report apple s total operating costs must be examined over several quarters to get a sense of whether the company is managing its operating costs effectively also investors can monitor operating expenses and cost of goods sold or cost of sales separately to determine whether costs are either increasing or decreasing over time sg a vs operating costsselling general and administrative expense sg a is reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses g a of a company it includes all the costs not directly tied to making a product or performing a service that is sg a includes the costs to sell and deliver products or services in addition to the costs to manage the company sg a includes nearly everything that isn t in the cost of goods sold cogs operating costs include cogs plus all operating expenses including sg a limitations of operating costsas with any financial metric operating costs must be compared over multiple reporting periods to get a sense of any trend companies sometimes can cut costs for a particular quarter which inflates their earnings temporarily investors must monitor costs to see if they re increasing or decreasing over time while also comparing those results to the performance of revenue and profit 