Operating Expenses

Operating Expenses are periodic expenses necessary to maintain and maintain production of effective gross income.  Operating expenses include fixed expenses and variable expenses including replacement reserves. 

Expenses such as depreciation, debt service, capital expenditures, federal income taxes, capital improvements and other expenses not related to the production of income are not included as operating expenses.

The following problems emphasize the Replacement Reserves using the Sinking Fund method of estimating an appropriate amount to allocate to operating expenses for replacement of short lived components.