Final answer:
An example of an expense classification by function is cost of goods sold, which includes direct costs associated with product manufacturing or service delivery. Distinguishing between fixed and variable costs, as well as between explicit and implicit costs, is essential for business financial management.
Step-by-step explanation:
An example of an expense classification by function is cost of goods sold (C). Expense classification by function relates to the different areas within a business where expenses are incurred. Cost of goods sold represents expenses directly tied to the production of products or services that are sold by a company. This is in comparison to classifications by nature, such as tax expense or interest expense, which are more tied to financial operations than to the actual production or service processes.
Fixed costs and variable costs are two broad categories of business expenses. Fixed costs, like rent or equipment leases, do not change with levels of production, whereas variable costs vary depending on production volume. This distinction is important for businesses to consider when planning and analyzing their expenditure.
It is also important to understand the difference between explicit costs, which are out-of-pocket expenses, and implicit costs, which represent the opportunity costs of using resources already owned by the company. These concepts are essential for a comprehensive understanding of business costs and expenditures.