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Financial Terms and Glossary

Operating cost

Operating Cost

Operating costs refer to the expenses incurred in the day-to-day running of a business. These costs include direct expenses like raw materials, wages, and utilities, as well as indirect costs such as administrative overhead. Operating costs are necessary for a company to generate revenue, and managing these costs efficiently is critical for maintaining profitability. Operating costs are typically listed on a company’s income statement.

Example

A restaurant's operating costs include food ingredients, kitchen staff wages, and utility bills for gas and electricity.

Key points

• The expenses incurred in the daily operations of a business.

• Includes both direct and indirect costs.

• Essential for generating revenue and maintaining profitability.

Quick Answers to Curious Questions

Why is managing operating costs important for businesses?

Efficient management of operating costs helps maximize profitability by minimizing unnecessary expenses.

What are examples of operating costs?

Examples include wages, raw materials, rent, utilities, and administrative expenses.

How can reducing operating costs improve profitability?

Lower operating costs mean higher profit margins, as the business retains more revenue after covering essential expenses.

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