Operating cost facts for kids

Operating costs, also known as operational costs, are the money a business or a piece of equipment needs to spend to keep running. Think of it as the regular bills you pay to keep something working. These costs are for the things an organization uses just to stay open and active.

What Are Business Operating Costs?

For a business, operating costs usually fit into three main types:

• Fixed costs: These costs stay the same no matter how much a business produces or sells. They don't change if the business is busy or quiet. An example is the rent for a building. You have to pay it even if you don't sell anything that day.
• Variable costs: These costs change depending on how much work is done. If a business makes more products, these costs will likely go up. For example, the cost of raw materials for making products is a variable cost. If you make more items, you need more materials.
• Semi-variable costs: These are expenses that are needed to keep the business in good shape. They might have a fixed part and a variable part.

Understanding Business Overhead Costs

Overhead costs for a business are the expenses for things an organization needs just to exist and operate. These are not directly linked to making a product or service. They are like the background costs.

Here are some examples of overhead costs:

• Paying the rent for the office space.
• The cost of electricity to power the office lights.
• Wages for some office staff, like receptionists.

Costs that are not overhead are usually "incremental." This means they increase directly with production. For example, the cost of raw materials used to make products is an incremental cost.

You can figure out the operating cost of a business by adding the cost of goods sold to its operating expenses. Operating expenses include:

• Administrative and office expenses: These are costs like rent, salaries for office staff, insurance, and fees for directors.
• Selling and distribution expenses: These include costs for advertising and salaries for salespeople.

In short, operating expenses cover all the costs needed to run the business, like salaries, rent, office supplies, and furniture.

What Are Equipment Operating Costs?

When we talk about a device, a machine, or a facility, its operating costs are the regular, usual expenses of using that equipment. This does not include the initial cost of buying or building the equipment.

Almost all equipment has operating costs. If equipment had no cost to run, needed no people, took up no space, and never wore out, it would have no operating cost! Sometimes, equipment might seem to have low or no operating costs because the cost is hidden or covered by something else.

Equipment operating costs can include:

• Salaries or wages for the people who operate the equipment.
• Fuel costs, like electricity for machines or gas for vehicles.
• Public utilities, such as telephone service or internet for the equipment.
• Maintenance to keep the equipment working well.
• Office supplies and other items that get used up.
• Insurance payments for the equipment.
• Depreciation: This is the way equipment loses value over time as it gets older and wears out. It also includes the cost of replacing it eventually.
• Damage from accidents or normal wear and tear.

Some of these costs might not apply to every situation. For example:

• A solar panel on a home mostly has an initial cost. Once it's set up, it usually doesn't have personnel costs or fuel costs.
• If you buy a car for your own use, you don't pay yourself a salary to drive it.