When a cost is designated as an expense, it can be assigned to a wide range of possible expenses, such as:
- Cost of goods sold
- Selling expenses
- General and administrative expenses
- Extraordinary items
- Financing costs
Thus, the nature of a cost drives the type of expense to which it is eventually assigned.
A cost may also be designated as a variable cost, which varies with the level of activity. For example, the telephone cost tends to vary with the number of employees. A cost can instead be designated as a fixed cost, which means that it does not vary with changes in the level of activity. For example, the lease of a building will not vary, irrespective of the revenues of the business housed within that facility.