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Expenses definition3/29/2023 ![]() ![]() ![]() It is noteworthy that the same category of an operating expense can be either a fixed cost or a variable cost, depending on the situation. A fixed cost remains the same no matter what the production level is, while variable cost does vary with the number of products or services that a company produces.įor example, fixed costs are things such as rent, lease payments and insurance expense, and labour, raw materials and sales commissions are variable costs. In such a way, a manager can better understand the nature of the expense. When it comes to analyzing operating expenses, managers classify the expenses as either fixed or variable. Purchasing machinery, for example, is considered a capital expenditure, whereas, repair and maintenance of the machinery is considered an operating expense. When it comes to capital or physical asset-related costs, however, it is important to make a distinction between operating expenses and capital expenditures as the two are treated differently for accounting purposes.Ĭapital expenditures are assets that are purchased and have a multiyear life, and are used in the operations of the business. Operating Expenses and Capital Expendituresįor businesses, operating expenses may typically include supplies, advertising expenses, administration fees, wages, rent, and utility costs. Encompassed by a red border, Amazon’s operating expenses include the cost of sales, fulfillment, marketing, general and administrative, technology and content, and other operating expenses. ExampleĪn example of ‘s income statement is shown below. However, it is an operational activity for real-estate companies, given that the purchased building is intended for resale. For instance, buying a building is typically an investing activity in most industries. A business activity can be classified as operational in one industry, but financing or investing in another. It is critical to note that operational activities differ greatly among industries. For example, the main operating activity for a manufacturing company is to produce the product from raw materials, while for a trading company, it is to buy products from the supplier and sell them to the end-users. The operating activities primarily cover the commercial activities of the company. ![]() It is important to distinguish between operating expenses and capital expenditures as the two are treated differently for accounting purposes.īefore calculating a company’s operational expenses, it is essential to identify the operational activities or the primary revenue-producing activities of the business and other activities that are not financing or investing activities.Operational activities are a company’s key commercial activities in generating revenue.Operating expenses reflect the operational activities, not the investing or financing activities of a company. ![]()
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