Overhead vs. Operating Expenses: An Overview

There are two main categories of expenses that a business can incur: overhead and operating expenses. Operating expenses are those that a business incurs as a result of its normal operations. These vary from industry to industry and can include materials, labor, and any machinerꦚy involved in production.

Overhead expenses are ongoing costs required to run a business, but they're not directly tied to the production of goods or services. Examples of overhead expenses include rent, utilities, insurance, and administrative salaries.

Expenses can be divided into several different types, including equipment costs, inventory, and facilities costs. These business expenses can be further divided into overhead or operating costs, each of which depends on the nature 🌺of the business being run.

Operating Expenses

澳洲幸运5开奖号码历史查询:Operating expenses are incurred by a company through its normal business operations. That means these expenses are required; they cannot be avoided becauඣse they help the business continue running. Operating expenses are also referred to by the abbꦿreviation "opex."

Examples of operating expenses include materials, labor, and machinery used to make a product or deliver a service. For example, operating expenses for a soda bottler may include the cost of aluminum for cans, machinery costs, and 澳洲幸运5开奖号码历史查询:labor costs.

Operating expenses are found on the income statement and are components of 澳洲幸运5开奖号码历史查询:operating income. Most inꦑcome statements exclude interest expenses and income taxes from operating expenses.

Reducing operating expenses can give companies a 澳洲幸运5开奖号码历史查询:competitive advantage. It can also increase their earnings, which can be a boon to investors. However, reductions in operating expenses can have a downside because they can hurt the comp🉐any's profitability. For example, staff cutbacks (and, therefore, salaries) can help reduce a company's operating expenses. But, by cutting personnel, the company may be hurting its productivity and, therefore, its profitability.

One way to determine a company's operating expenses is to think about the costs eliminated by 澳洲幸运5开奖号码历史查询:shutting down production for a period of time. For example, even though production f♕or the soda bottler (in the example above) may shut down, it still has to pay the lease paymඣents on its bottling facility.

Overhead Expenses

Overhead expenses are another type of business expense. They are costs not related to labor, direct materials, or 澳洲幸运5开奖号码历史查询:production. They represent more static costs and peꦯr🐻tain to general business functions, such as paying accounting personnel and facility costs.

These costs are gener𝔉ally ongoing, regardless of whether a business makes any revenue. Unl🍒ike operating expenses, these costs are usually fixed, meaning they can be the same amount over time.

In the scenario with the soda bottler above, the facility lease payments are still owed even if no current production takes place within the facility. Therefore, facility costs are overhead expenses. Like🌄wise, the company still incurs other business expenses, such as insurance payments and administrative and management salaries.

Overhead expenses are not necessarily fixed; they may also be semi-varia😼ble. The amounts that need to be paid may change slight🅠ly over time. Utilities are one example of a semi-variable overhead expense. The cost of power can change based on total usage. If the soda company increases production, for example, it will have to pay more for electricity.

Marketing and other expenses incurred to sell the product are also included in 澳洲幸运5开奖号码历史查询:overhead expenses. For the soda bottler, this includes commercial advertisements, signage in retail aisles, and promotional costs. These costs remain even if production is shut down for a s♔hort period of time.

Overhead expenses can be categorized based on where they fit into the b🦩usiness. They can include:

• Administrative overhead
• General business overhead
• Research overhead
• Transportation overhead
• Manufacturing overhead
• 澳洲幸运5开奖号码历史查询:Step costs

Business Expenses and Profitability

When companies want to increase profitability, they usually review their ov🃏erhead expenses. If business slows, cutting back on overhead expenses is ꧙usually the easiest way to reduce expenses.

Companies may review contracts for electrical consumption, Internet, and employee phone usage for reductions. In some cases, they may even turn to contract staff instead of full-time employees, which usually costs less because benefits aren't required when hiring independent contractors. 

Moreover, with remote work becoming mainstream, some companies have downsized their office spaces. That allows them to pay less in ren♛tal expenses and other ove🍨rhead expenses associated with maintaining an office space, such as electricity, Internet, furniture, consumables, maintenance, and other costs.

The Bottom Line

Overhead and operating expenses are both types of business expenses that are necessary for running a business,♍ but they differ in how they relate to the production of goods and services. Overhead costs are related to the general business, and they are fairly fixed.

Overhead costs can also be reviewed often to make adjustments. Operating costs are the direct costs required to produce a product oꦰr service, and they are difficult to avoid.