What are operating expenses?

Operating expenses refer to the ordinary and necessary costs incurred for the day-to-day functioning of a business. These expenses are essential for a company to maintain its operations, such as rent, utilities, salaries, and supplies.

Identifying operating expenses as ordinary and necessary is critical because it distinguishes them from other types of costs, such as capital expenditures or one-time expenses, which do not recur frequently and are not directly tied to the regular operational activities.

The other options may relate to costs associated with business operations, but they do not capture the full concept of operating expenses. For example, although production costs pertain to the creation of goods, they may not encompass all the recurring expenses necessary for running the business. Similarly, costs reimbursed by customers do not classify as operating expenses since they do not represent the business's out-of-pocket expenditures. Finally, the definition excluding fixed and variable costs does not accurately reflect what constitutes operating expenses, as these types of costs are fundamentally part of a business's operational budget.