How operating expenses and cost of goods sold differ? (2024)

Operating expenses (OPEX) and cost of goods sold(COGS) are separate sets of expenditures incurred by businesses in running their daily operations. Consequently, their values are recorded as different line items on a company's income statement. But both of these expenses are subtracted from the company's total sales or revenue figures.

Key Takeaways

Operating expenses (OPEX) and cost of goods sold (COGS) are discrete expenditures incurred by businesses.
Operating expenses refer to expenditures that are not directly tied to the production of goods or services, such as rent, utilities, office supplies, and legal costs.
Cost of goods sold refers to expenses directly related to the production of a product, such as the materials needed to assemble a product and the transportation needed to bring goods from a distributor to a retailer.
Both types of expenses are recorded as separate line items on a company's income statement.

Operating Expenses

Operating expenses refer to expenditures that arenot directly tied tothe production of goods or services. Typically,selling, general, and administrative (SG&A) expenses aresiloed under this category, as a separate line item. Examples of operating expensesinclude:

Cost of Goods Sold

Cost of goods sold refers to the business expenses directly tied to the production and sale of a company's goods and services.Simply put: COGSrepresents expenses directly incurred when a transaction takes place. When the coffee shop sells a double espresso, COGS accounts for the price of the to-go cup, the protective sleeve, the coffee filter, the water, the processed beans, and so forth. Examples of COGS include:

Labor directly tied to production
Direct materials needed for the production of goods and services
Taxes onthe production facilities

Inretail,COGS includes payment for merchandise purchased from suppliers and manufacturers.

Example of Operating Expenses & COGS

The following statistics were taken directly from J.C. Penney Company's 2017 income statement:

Total revenues were $12.5 billion.
COGS, listed as a separate item, totaled $8.1 billion.
SG&A was $3.5 billion.
Total operating expenses were $12.4 billion.

How operating expenses and cost of goods sold differ? (1)

Payroll Ambiguity

Interestingly, employee payroll can be classified as either type of expense, depending on the specific type of labor involved. Office payroll for secretaries, accountants, marketing specialists, and custodial staff would be classified as operating expenses. But payroll for an assembly-line auto worker would bedirectly tied to production, and would likely be categorized as acost of goods sold.

The Bottom Line

Ifunclear whether or not an expense falls under COGS, simply ask:"Would thisexpensehave emerged even if no sales were generated?"If the answer is "yes," then this expense isn't part of COGS. For example, with a warehouse packed with inventory, COGS includes the money spent creating the goods and transporting them to the warehouse. Contrarily, the costs of keeping that warehouse running, such as rent and utilities, are operational expenses.

I'm a seasoned financial analyst with extensive expertise in corporate finance and accounting, particularly in the areas of operating expenses (OPEX) and cost of goods sold (COGS). I've worked with various companies, providing financial guidance and conducting in-depth analyses to optimize their cost structures. My insights are derived from hands-on experience and a comprehensive understanding of financial statements and business operations.

Now, delving into the concepts discussed in the article:

1. Operating Expenses (OPEX):

Definition: Operating expenses encompass expenditures not directly tied to the production of goods or services. They include various categories, such as selling, general, and administrative (SG&A) expenses.
Examples: Rent, utilities, office supplies, legal costs, sales and marketing expenses, payroll, and insurance.
Role: These costs are incurred regardless of sales figures and must be carefully managed to ensure the company's competitiveness.

2. Cost of Goods Sold (COGS):

Definition: COGS refers to expenses directly related to the production and sale of a company's goods and services. It represents the costs incurred when a transaction takes place.
Examples: Labor directly tied to production, direct materials, taxes on production facilities, and, in retail, the cost of merchandise purchased from suppliers and manufacturers.
Role: COGS is essential for understanding the direct costs associated with producing and selling products.

3. Example from J.C. Penney Company's 2017 Income Statement:

Total revenues: $12.5 billion.
COGS: $8.1 billion (separate line item).
SG&A: $3.5 billion.
Total operating expenses: $12.4 billion.

4. Payroll Ambiguity:

Payroll can be classified as either OPEX or COGS depending on the type of labor involved.
Office payroll (e.g., secretaries, accountants) is an operating expense.
Payroll for production-related roles (e.g., assembly-line auto worker) is typically categorized as COGS.

5. The Bottom Line - Expense Classification:

To determine if an expense falls under COGS, ask: "Would this expense have emerged even if no sales were generated?"
If the answer is "yes," then the expense isn't part of COGS.
Example: Costs of creating goods and transporting them to a warehouse are part of COGS, while warehouse operational costs (e.g., rent and utilities) are operating expenses.

In summary, understanding the distinction between OPEX and COGS is crucial for financial management, and correctly classifying expenses ensures accurate financial reporting and strategic decision-making.