Here are some steps you can take to calculate operating expenses:Ĭreate a list of different categories your business spent money on that aren't directly related to product or service production. Operating expenses = (cost of office supplies) + (cost of accounting supplies) + (insurance) + (legal fees) + (licensing fees) + (marketing expenses) + (payroll) + (maintenance and repairs) + (travel expenses) + (taxes) + (rent and utilities) The formula you use may look similar to this: To calculate your operating expenses accurately, create a list of all the expenses that went toward running your business rather than producing a specific product or service. Read more: What Are Operating Expenses? (With Examples) How to calculate operating expenses Operating expenses is also sometimes referred to as sales, general and administrative expenses (SG&A). Instead, they play a supporting role in making sure the business functions as a whole. While these expenses are essential to keep the business operational, they don't necessarily impact the production of a product or service directly. Some examples of operating expenses include advertising, human resources, sales, accounting, information technology, administrative positions and legal resources. Operating expenses refer to the overhead costs associated with running a business. This means they made a profit of approximately $400,000. Vern's Manufacturing Co.'s cost of sales last quarter was $600,000. They use the following formula to determine their cost of sales: didn't purchase any indirect materials or pay for any indirect labor. They also spent $50,000 on rent and utilities for their production facility during this time. The business manager reviews their records and sees that they spent $100,000 on raw materials to make products and paid their employees $450,000 in wages. They want to determine what their total cost of sales was during this time so they can tell if they made a profit. Here's an example of how a manufacturing company may calculate its cost of sales: Related: How To Calculate Sales Margins Example of calculating the cost of sales Identify how much you spent on production facilities.Īdd all of your costs together to determine the cost of sales. If you purchased indirect materials to support production, determine the cost.Īssess how much you spent on employee wages.ĭetermine whether you paid for any indirect labor to support production. Identify how much you spent on raw materials. Here are some steps you can take to calculate the cost of sales: You can use the formula below to calculate the cost of sales:Ĭost of sales = (cost of raw materials) + (cost of indirect materials) + (employee wages) + (cost of indirect labor) + (cost of production facilities) To calculate the cost of sales accurately, create a list of all the production, sales and purchase costs relevant to the specific service or product your company offers. Read more: Cost of Sales: A Definitive Guide (With Example) How to calculate the cost of sales Other common terms for the cost of sales include the cost of services and cost of goods sold (COGS). Business managers often assess their cost of sales to determine whether the company they work for is profitable and identify areas where they can decrease production costs. Each of these costs goes toward the production or sale of a specific product or service. It includes the cost of raw materials, employee wages, utilities, equipment, storage, rent and shipping costs. The cost of sales refers to how much a company spends on producing and delivering its products or services to customers. Related: Types of Business Expenses and How to Record and Budget for Them What is the cost of sales? In this article, we explain what the cost of sales and operating expenses are, share how to calculate each of them and discuss the key differences between them. If you work in business or production management, you might benefit from learning about when and how to calculate your cost of sales and operating expenses. While there are several ways companies can track their spending, assessing their cost of sales and operating expenses can help them make smart financial decisions. It's important for businesses to keep track of their expenses so they can develop accurate budgets and ensure they remain profitable.
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