Question & Answer: how can operating expenses be broken into categories, and why would it make sense to do this…..

ANSWER:

Operating expenses refers to the expenses a company incurs that are not related to the production of a product. These costs include items like office supplies, utilities, payroll, rent, marketing, insurance and taxes. The operating expenses are often divided into two categories: marketing and administrative. Marketing expenses are the cost associated with the promotion of product and services. These include items like business and stationery printing, trade show booths, advertising, sales salaries, commission expenses, brochure printing, television and radio advertising, direct market expense, and print advertising. On contrary, administrative expenses are the necessary expenses that are incurred in the course of running a company day to day activities and are not directly tied to a specific product or service.

It makes a sense to break operating expenses into categories because operating expenses can greatly impact the profitability of a business. It is important to measure because operating expenses is an important aspect of managing a financially healthy business. With categorisation it can make a comparison under which head of operating expense the company is paying more and need to be controlled.