NCEA Level 1 Accounting Practice Exam

Insurance costs are classified as operating expenses in a business because they are necessary for the day-to-day functioning of the business but do not directly contribute to the production of goods or services. Operating expenses include costs incurred in the normal course of business operations, such as rent, utilities, and salaries, alongside insurance premiums. These expenses are typically incurred regularly, whatever the level of production or sales.

In contrast, fixed expenses refer to costs that remain constant regardless of business activity levels, such as long-term leases, but operating expenses can vary in nature. Variable costs fluctuate with production levels, while capital expenditures are investments in tangible assets that provide long-term benefits, such as machinery or real estate, and are not categorized as operational costs. Thus, since insurance is crucial for risk management and is a recurring cost necessary for the functioning of the business, it is best categorized as an operating expense.