Operating expenses (OPEX)
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt.Revised 13-january 2012.
The Meaning of Operating Expenses (OPEX)
In operating a business, the term operating expense is used as a budgeting and spending term, but also as an income statement term in financial accounting.
Operating Expense as a Budgeting and Spending Term
Operating expenses (OPEX) are defined as non-capital expenses (non capital operating costs) incurred by a company in normal operations: salaries and wages, insurance costs, floor space rental, electricity, computer maintenance contracts, software maintenance contracts, and so on. In brief, almost all routine expenditures a company makes in operating a business are operating expenses, except for a few special non-operating expenses (such as costs of financing a loan, or one-time costs for closing a plant), and except for capital costs (see assets and capital budget). For more explanation of operating expense budgeting and spending, see the encyclopedia entry for operating budget.
Operating expenses do brings some tax savings. The expense is subtracted from income, and that means less tax. Specifically
Tax Savings on Expense = Expense x Tax Rate
For example, a company taking in $100 on revenue with a 30% rate on operating income, would pay taxes of $30 if it had no expenses. But if it had expenses of $60 to produce that income, the 30% tax would be applied only to $40 (That is, $100-60), for a tax of $12. That is a tax savings of $30 - 12 or $18, or:
Tax Savings on Expense = $60 x 30% = $18
Operating expenses typically represent spending for such things as:
- Employee salaries/wages and overhead
- Office space rental and utilities costs
- Employee travel and training expenses
- Marketing communication / advertising expenses
- Telephone and internet services
- Outside consultant fees
Operating Expense as an Income Statement Category
There is also a major income statement category (or sometimes two categories) called Operating Expenses which appears beneath the gross profit line, above Extraordinary Items and above Financial Income/Expenses. That means that income statement "Operating Expenses" do not impact reported gross profit or gross margin, but do impact operating profit, operating margin, and net profit and net profit margin...
Five major categories of expense items may appear on the income statement as follows:
- Cost of Goods Sold
The costs of producing goods or services - Operating Expenses – Selling Expenses
The costs of selling the goods or services - Operating Expenses – General and Administrative Expenses
Overhead, support, and management costs from across the company.
- Financial Revenues and Expenses
These include revenues from invested funds and costs from financing borrowed funds - Extraordinary Items
These may include large gains or losses from selling land or major assets, or from major actions restructuring the company (e.g., the expenses of laying off part of the workforce).
When used in the budgetary sense (above section), the term "operating expense" can include expense items above and below the income statement's Operating Expenses categories, including all categories shown above. Wages for direct labor in product manufacturing, for instance, are planned in the Manufacturing operating budget, but they can appear on the income statement as part of "Cost of Goods Sold," not as an income statement "Operating Expense."
For an income statement example showing example entries in the major statement categories, including Operating Expenses, see the encyclopedia entries for expense and for income statement.
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