What are Operating Expenses?
Operating Expenses (OpEx) represent the indirect costs incurred by a business to continue running its day-to-day operations. While not directly tied to the revenue generated from the products/services, operating expenses are an essential part of a company’s core operations.
How to Calculate Operating Expenses (Step-by-Step)
Operating expenses (OpEx) are associated with the core operations of a company but do not directly contribute to the production of the product/service sold.
Unique to operating expenses, the majority of costs classified as OpEx are fixed costs, which means they are NOT directly linked to revenue. Instead, OpEx remains relatively constant regardless of production volume.
For example, the rent expense for an office is stated on the contract with the building landlord and does not fluctuate based on revenue performance.
Note that not all OpEx are fixed costs, as an item like office supplies can be viewed as more of a variable cost since more purchases would be made if production levels were higher.
Operating Expense Examples (OpEx)
The most common examples of operating expenses incurred by companies are listed below:
| OpEx Examples |
|
|
|
|
|
|
|
Apple (AAPL) Operating Expenses: Income Statement Example
On the income statement, the section for operating expenses can be found below gross profit and above operating income (EBIT).
Occasionally, OpEx can be consolidated into a single line item, but the standard layout is for the expenses to be broken out into multiple line items.
For example, Apple places “Research & Development” and “Selling, General & Administrative” expenses into separate buckets.
Apple Operating Expenses (Source: 2020 10-K)
Operating expenses are paid for using gross profits, which are the earnings once COGS have been subtracted.
How OpEx Impacts Operating Income (EBIT) and Operating Margin
By deducting operating expenses from gross profit, the operating profit (EBIT) and operating margin can then be calculated, as shown below.
Since operating income takes into account operating costs (i.e. COGS and OpEx), it represents the cash flow from core operations before accounting for other non-core sources of income/expenses.
That said, management should strive to be more efficient and maintain reasonable levels of operating costs, especially because OpEx is a significant component of the break-even point of a company.
