Accounting Dictionary

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Cost

Definition: Cost is the expenditure required to create and sell products and services, or to acquire assets. When sold or consumed, a cost is charged to expense.

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.