Sudan University of Science and Technology

College of Engineering and Industries Technology

Chemical Engineering Department

THE DIFFERENCES BETWEEN

OPERATING COST AND THE WORKING
COSTS

SUPERVISOR: DR/SAMAH
 Working capital

Prepared by
1. Leena Osman
2. Amal Majed
3. Eelaf Abd-Al-Razeq
4. Mohammed Essam
5. Al-Husein Salah Al-Dein
6. Fatima Al-Seir
 Outlines:(Working capital ):

 Definition.
 Types of Working Capital.
 The working capital for an industrial plant
 Working capital calculation
 Working capital example
Definition

 The cost of working describes the amount of money you spend

trying to perform your job.[1] Calculating these costs can help you
Definition
evaluate your compensation and can help you negotiate a contract
or a salary increase. If you review the cost
Definition:

 Working capital is a financial metric that is the difference between a

company's current assets and current liabilities. As a financial metric,
working capital helps plan for future needs and ensure the company has
enough cash and cash equivalents meet short-term obligations, such as
unpaid taxes and short-term debt
 Working capital is used to fund operations and meet short-term obligations.
Types of Working Capital:

 Depending upon the Periodicity & concept working capital can

be classified as below:
1. Permanent Working Capital
2. Regular Working Capital
3. Reserve Margin Working Capital
4. Variable Working Capital
5. Seasonal Variable Working Capital
6. Special Variable Working Capital
 Cont:

 1- Permanent Working Capital

It is that portion of the working capital that remains permanently tied up in current assets to
undertake business activity uninterruptedly.
 2- Regular Working Capital
This is defined as the least amount of capital required by a business to fund its day-to-day
operations of a business.
 3-Reserve Margin Working Capital
Apart from day-to-day activities, a business may need some amount of capital for
unforeseen circumstances.
 Cont:

 4-Variable Working Capital

This can be defined as the working capital invested for a temporary period of time in the
business.
 5-Seasonal Variable Working Capital
This refers to the increased amount of working capital a business needs during the peak
season of the year.
 6-Special Variable Working Capital
Supplementary working capital may also be required by a business to undertake
exceptional operations or unforeseen circumstances.
 -7Gross Working Capital
This refers to the aggregate amount of funds invested in the current
assets of the business.
 -8Net Working Capital
Net Working Capital is the amount by which current assets exceed the
current liabilities of a business.
The working capital for an industrial plant :

The working capital for an industrial plant includes the following:

 Raw materials and supplies carried in stock,
 Finished products in stock and semi-finished products in the process of being
manufactured,
 Accounts receivable.
 Cash kept on hand for monthly payment of operating expenses, such as salaries,
wages, and raw-material purchases, accounts payable and taxes payable.
Working capital calculation

Working capital is the difference between current assets and current

liabilities. It is not to be confused with trade working capital (the latter
excludes cash).
The basic calculation of working capital is based on the entity's gross
current assets.
Working capital =current asset - current liability
Working capital calculation

Inputs
Current assets and current liabilities include four accounts
which are of special importance.These accounts represent
the areas of the business where managers have the most
direct impact:
 Working capital calculation

1. cash and cash equivalents (current asset)

2. accounts receivable (current asset)
3. inventory (current asset), and
4. accounts payable (current liability)
 Working capital calculation

Working capital cycle

meaning
A positive working capital cycle balances incoming and outgoing payments to minimize net working capital and
maximize free cash flow. For example, a company that pays its suppliers in.
30 days but takes 60 days to collect its receivables has a working capital cycle of 30 days.
 30-day cycle usually needs to be funded through a bank operating line, and the interest on thisfinancing is a
carrying cost that reduces the company's profitability. Growing businesses require cash, and being able to free
up cash by shortening the working capital cycle is the most inexpensive way to grow. Sophisticated buyers
review closely a target's working capital cycle because it provides them with an idea of the management's
effectiveness at managing their balance sheet and generating free cash flows.
Working capital example

Example
 Suppose ABC Limited has Current Assets of $10,00,000
and Current Liabilities of $15,00,000. Next, calculate the
WC of the Company.
Working capital example

Solution:
WC = Current Assets _ Current liabilities
10,00,000_15,00,000 = _5,00,000

Note :
 since the Current Liabilities are more than the Current Assets of the Company.
ABC Limited is suffering from Liquidity Crisis due to the negative Working
Capital of the Company, which will hinder Business Operations in the long term.
Outlines:(operating costs):

 What are the operating costs

 Important points about operating cost

 Understanding Operating Costs

 Types of operating costs:

 How to Calculate Operating Costs
Mosab Najeeb.
Israa Siddig.
Musab Mohammed Abou.
Mayada Mutasim.
Shahir Tower.
What are the operating costs

 Operating costs are costs that associated with the maintenance and
administration of a business on a day-to-day basis. Operating costs
include direct costs of goods sold (COGS) and other operating
expenses—often called selling, general, and
administrative (SG&A)—which include rent, payroll, and other
overhead costs, as well as raw materials and maintenance expenses.
Operating costs exclude non-operating expenses related to
financing, such as interest, investments, or foreign currency
translation.
 Important points about operating cost

 Operating costs are the ongoing expenses incurred from the normal day-to-day of
running a business.
 Operating costs include both costs of goods sold (COGS) and other operating
expenses—often called selling, general, and administrative (SG&A) expenses.
 Common operating costs in addition to COGS may include rent, equipment,
inventory costs, marketing, payroll, insurance, and funds allocated for research
and development.
 Operating costs can be found and analyzed by looking at a company's income
statement.
Understanding Operating Costs

 Businesses have to keep track of operating costs as well as the costs

associated with non-operating activities, such as interest expenses on
a loan.
 Generally speaking, a company’s management will seek to maximize
profits for the company, profit can be increased both by increasing
revenue and by decreasing operating costs. Because cutting costs
generally seems like an easier and more accessible way of increasing
profits, managers will often be quick to choose this method.......
 Cont:

 For example, if a company cuts its advertising costs, its

short-term profits will likely improve since it is spending less
money on operating costs. However, by reducing its
advertising, the company might also reduce its capacity to
generate new business such that earnings in the future could
suffer
Types of operating costs:

They include many components of operating expenses such as:

 Accounting and legal fees.
 Bank charges.
 Sales and marketing costs.
 Travel expenses.
 Entertainment costs.
 Non-capitalized research.
 Office supply costs.
 Rent .

 Repair and maintenance costs.

 Utility expenses.

 Salary and wage expenses.

Fixed Costs:

 A fixed cost is one that does not change with an increase or decrease in sales or
productivity.

 Fixed costs generally include overhead costs, insurance, security, and equipment.

 Examples of fixed costs: rent, lease costs, salaries, utility bills, insurance and loan
repayments.
Variable costs:

 Variable costs are comprised of costs that vary with production.

 Unlike fixed costs, variable costs increase as production increases and decrease as the

production decreases.

 Examples of variable costs include raw material costs and he costs of electricity.
Semi-variable Costs:

 In addition to fixed and variable costs, it is possible for a company’s operating costs to be
considered as semi-variable ( or semi-fixed ).

 These costs represent a mixture of fixed and variable components and can be thought of
as existing between fixed and variable costs.

 Semi-variable costs vary in part with increases or decreases in production, like variable
costs, but still exist when production is zero, like fixed costs.

 An example of semi-variable costs is overtime labor.

Affects of Operating Costs on Net Profit

Operating costs that are high or increasing can reduce a company's net profit.
Company’s management will look for ways to stabilize or decrease operating
costs while still balancing the need to manufacture goods that meet consumer
demands.
 If the Operating costs become too high, management need to increase the
price of their products in order to maintain profitability.
 If the operating cost is relatively low, that mean that the net profit will be
relatively high, because the pieces of the goods will be low so they attract
customers
How to Calculate Operating Costs

 To calculate your operating cost, you’ll need to know both your total operating
expenses as well as COGS. You can add up your costs for any timeframe you
choose, such as monthly, quarterly, or annually.
 Then, calculate the total operating expenses, as mentioned above. Finally, add
COGS and operating expenses to determine the total operating cost of your
business.

Operating cost =Cost of goods sold + Operating expenses

How to Calculate Operating Costs

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock.

 For example, if a company has operating expenses of $100,000 and total sales of $1 million, its OER would
be 10%.

=10%
COGS = * Total Sales – OPEX
COGS = 100000*10^6 -0.1 = 10^11 $
+ COGS
= + 10^11 $ =100000.1*10^6
Thank you For Paying
Attention