Those expenses which a business incurs to run its day-to-day business operations but are not related to the production process directly are known as operating expenses. These expenses can be categorized as selling, admin, marketing, advertising expenses etc.
Such expenses that are neither related to normal course of activities of a business nor related to the production process of a business are known as non-operating expenses. These expenses may occur regularly or on ad hoc basis e.g. interest expense, cost of relocating, cost of restructuring, cost paid to settle or pay damages for a law suit etc.
Difference between operating and non-operating expenses
The main difference between operating and non-operating expenses is given below:
1. Primary distinction:
Operating expenses are such business expenses that are necessary to facilitate and run a business normally. These expenses do not make part of the main production process for an organization, thus are not included in the cost of goods sold. Nevertheless, these costs are very important to bring and sell company’s products or services in their relevant markets. Non-operating costs are those costs that a business spends to meet its certain financial obligations, but are not related to its usual commercial activities.So, non-operating costs do not arise in result of core business activities or operations.
Operating expenses are largely related to those activities which are associated with the operating cycles and throughput of a business. For a manufacturing business, such expenses are not related to the manufacturing process or making of goods but are necessary to make sales and run business smoothly. Maintenance expenses, salaries and wages of non-production staff, some taxes, legal fees, sales bonuses and/or commissions, marketing expenses, advertising expenses, office and administrative expenses etc. are some types of operating expenses. Non-operating expenses normally arise due to a financial or legal responsibility of the business which needs to be paid to meet liabilities of that business. Non-mandatory insurance payments, bad debts (if outside the normal course of business), foreign exchange losses, Interest payments, fees bore for settlement of court cases against the business, costs for shifting or restructuring etc. are some types of non-operating expenses. Nevertheless, there may be other types of expenses that can be categorized as both operating or non-operating expenses based on the requirements of different markets and/or businesses.
The management of a company needs to segregate between operating and non-operating expenses because it can help them better gauge the financial and performance indicators of their business. The effective management of operating costs directly results in efficacious running of a business. These costs are normally controllable and therefore can be used to evaluate the performance of management. However, non-operating costs are such costs which are usually non-controllable due to their nature, thus such costs must not become part of appraisals of management.
4. Classification in financial statements:
Operating expenses are normally written after the head of gross profit in the statement of profit or loss whereas non-operating expenses are recorded at the bottom of statement of profit or loss. This classification makes it easier for the users of this statement to better understand and segregate between the costs that occurred in consequence of usual business activities and vice versa.
Operating versus non-operating expenses – tabular comparison
|Feature||Operating Expenses||Non-operating Expenses|
|Primary distinction||Costs that are vital to run the daily activities of a business.||Costs that are not related to production costs or the daily activities of business.|
|Types||Revenue costs, administration cost, marketing costs etc. are some types.||Interest payments, foreign exchange losses etc. are some types.|
|Decision-making||These costs are generally controllable and can be used to measure performance of management.||These costs are normally non-controllable and cannot be used to assess performance of management.|
|Classification in financial statements||These are recorded under the costs of goods sold in the statement of profit or loss.||These costs are recorded at the end of the statement of profit or loss and are deducted from operating income.|
Conclusion – operating expenses vs non-operating expenses
Every business is commenced with an aim to earn long-term sustainable profits. These profits are directly related to the amount of income a business can generate through its commercial activities, but this income cannot be produced unless the business bears some related costs. Every business, specifically manufacturing businesses incur costs related to production of goods (direct labor, direct material etc.) however, apart from these costs, a business has to devote its funds to such activities which do not produce anything directly but without them business will not be able to continue its activates. These costs are operating costs. Still some costs are needed that a business has to incur to fulfill its monetary commitments. Any such costs other than operating and production are termed as non-operating costs. Although, it is unlikely for trading companies and service sector organizations to incur any production costs, but operating and non-operating costs are relevant to all types of businesses.