Operating Cost

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Operating Costs: Definition, Formula, Types, and Examples

Operating costs are the ongoing, day-to-day expenses required to run a business. They include the direct costs of producing goods or services and the indirect costs of operating the company, but exclude non-operating expenses such as interest, financing costs, or one-time gains and losses.

Key points

  • Operating cost = Cost of goods sold (COGS) + Operating expenses.
  • Operating income = Revenue − Operating costs.
  • Operating costs are evaluated over a reporting period (month, quarter, year) using amounts on the income statement.
  • Cutting operating costs can increase short-term profits but excessive cuts may harm productivity, customer service, and long-term revenue.

How to calculate

Operating cost = Cost of goods sold (COGS) + Operating expenses

Both components appear on the income statement. Calculate for the period you’re analyzing (e.g., quarterly or annually).

What’s included

  • Cost of Goods Sold (COGS)
  • Direct materials and components
  • Wages and benefits for production workers
  • Rent, property tax, utilities, and repairs for production facilities

  • Direct production supplies and equipment maintenance

  • Operating Expenses (indirect/top-level expenses)

  • Salaries and benefits for administrative and executive staff
  • Marketing and advertising
  • Legal, accounting, and banking fees
  • Rent and utilities for offices (non-production facilities)
  • Travel, entertainment, and office supplies
  • Non-capitalized research and development

Cost behavior: fixed, variable, and semi-variable

  • Fixed costs: Do not change with production or sales volume (e.g., rent, some insurance). Fixed costs enable economies of scale because per-unit fixed cost falls as production increases—until capacity limits are reached.
  • Variable costs: Change proportionally with production or sales (e.g., raw materials, piece-rate labor, production utilities).
  • Semi-variable (semi-fixed) costs: Contain both fixed and variable elements (e.g., base payroll plus overtime; a service contract with minimum fees plus per-use charges).

SG&A and operating costs

Selling, general, and administrative expenses (SG&A) are a subset of operating expenses. SG&A covers costs of running and managing a business and bringing products to market (sales and delivery). Together, SG&A and COGS compose total operating costs.

Example (illustrative)

From an income statement for a large company (fiscal year example):
– Cost of goods sold (COGS): $210.4 billion
– Operating expenses: $57.5 billion
– Total operating costs = $210.4B + $57.5B = $267.9 billion

Investors and managers track operating costs across periods and compare them to revenue to assess cost management and profitability trends.

Bottom line

Operating costs measure the everyday expenses required to produce goods and run a business. They should be analyzed over time and in relation to revenue and other performance metrics. Efficient cost management can improve profits, but indiscriminate cuts risk undermining growth, quality, and long-term profitability.