what are operating costs 
operating costs are associated with the maintenance and administration of a business on a day to day basis operating costs include direct costs of goods sold cogs and other operating expenses often called selling general and administrative sg a which include rent payroll and other overhead costs as well as raw materials and maintenance expenses operating costs exclude non operating expenses related to financing such as interest investments or foreign currency translation the operating cost is deducted from revenue to arrive at operating income and is reflected on a company s income statement investopedia joules garciaunderstanding operating costsbusinesses have to keep track of operating costs as well as the costs associated with non operating activities such as interest expenses on a loan both costs are accounted for differently in a company s books allowing analysts to determine how costs are associated with revenue generating activities and whether the business can be run more efficiently generally speaking a company s management will seek to maximize profits for the company because profits are determined both by the revenue that the company earns and the amount the company spends in order to operate profit can be increased both by increasing revenue and by decreasing operating costs because cutting costs generally seems like an easier and more accessible way of increasing profits managers will often be quick to choose this method trimming operating costs too much can reduce a company s productivity and as a result its profit as well while reducing any particular operating cost will usually increase short term profits it can also hurt the company s earnings in the long term for example if a company cuts its advertising costs its short term profits will likely improve since it is spending less money on operating costs however by reducing its advertising the company might also reduce its capacity to generate new business such that earnings in the future could suffer ideally companies look to keep operating costs as low as possible while still maintaining the ability to increase sales 