What type of expenses can variable costs refer to?

Variable costs refer to expenses that change in direct proportion to the level of business activity or production. This means that as a company increases its output, the variable costs increase as well, and when production decreases, these costs also decline. Typical examples of variable costs include materials used in production, direct labor costs associated with creating goods, and any costs that depend on the volume of sales or production, such as shipping expenses or utility bills that increase with usage.

Understanding variable costs is crucial for budgeting and financial planning because they directly affect a company's profitability. Unlike fixed costs, which remain the same regardless of production levels, variable costs provide flexibility. This variability allows businesses to adapt their expenses in accordance with their operational capacity and market demand.