Operating Expenses: Comparative Analysisįrom a quick glance, COGS vs. To align the cash outflow with the revenue, Capex is expensed on the income statement through depreciation – a non-cash expense embedded within either COGS or OpEx.ĭepreciation is calculated as the Capex amount divided by the useful life assumption – the number of years that the PP&E will provide monetary benefits – which effectively “spreads” the cost out more evenly over time. The difference lies in the useful life, as it can take several years to derive the benefits from Capex and the purchased fixed assets (PP&E). Under the matching principle of accounting, the expense must be recognized in the same period as when the benefit (i.e. That brings us to another topic: “How is Capex related to COGS and OpEx?”īoth COGS and OpEx appear on the income statement, but the cash impact of Capex does not. It is important to note that operating expenses (OpEx) represents required spending and is considered one of the “reinvestment” outflows, with the other being capital expenditures (Capex). The takeaway here is that operating expenses are far more than just overhead (“keeping the lights on”). Some common examples of OpEx are employee wages, rental expenses, and insurance.Ĭontrary to a common misconception, operating expenses do not solely consist of overhead costs, as others can help drive growth, develop a competitive advantage, and more.įurther examples of other types of OpEx are: Without a doubt, spending on COGS is important to meet customers’ demand and remain competitive in the market, but OpEx is just as important as a company quite literally cannot continue running without spending on these items. For an item to be considered an operating expense, it must be an ongoing cost to the business. Operating Expenses → OpEx, on the other hand, refer to the costs related to the core operations but are NOT directly tied to revenue production.Some common examples of costs included in COGS are the purchase of direct materials and direct labor. COGS → The cost of goods sold (COGS) line item represents the direct cost of selling products/services to customers.Now, let’s move on to discussing the differences between COGS and OpEx. Learn More → Cost of Goods Sold Definition ( IRS) COGS vs. Operating Income (EBIT) = (Revenue – COGS) – Operating Expenses
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