What are variable costs?

Variable costs are expenses that fluctuate with the production volume. This means that as more units of a product are produced, the total variable cost increases, and if production decreases, these costs drop accordingly. Examples include costs of raw materials, direct labor involved in production, and utility costs that rise with increased usage during higher levels of production.

In the context of financial planning, understanding variable costs is crucial for budgeting and forecasting profitability. By analyzing how these costs behave in relation to production levels, businesses can better manage their financial resources, set pricing strategies, and make informed decisions about scaling operations.

The other options represent fixed costs or one-time expenses, which do not change with production volume, making option B the only choice that accurately defines variable costs.