What are variable costs?

Variable costs are expenses that change in direct proportion to the level of production or sales output. This means that as a company produces more goods or services, the total variable costs will increase correspondingly, and conversely, if production decreases, the total variable costs will decrease as well. This characteristic allows businesses to adjust their expenditures based on actual production levels, making it essential for budgeting and financial forecasting.

For instance, in a manufacturing setting, costs such as raw materials, direct labor, and utilities associated with production typically fall under variable costs, as they are directly tied to the quantity produced. This direct relationship aids managers in decision-making regarding pricing, production levels, and overall profitability.

The other options do not accurately define variable costs; costs that remain constant regardless of production are defined as fixed costs, while fixed costs allocated to variable expenses do not reflect the variable nature. Expected costs for future projects pertain to projected expenses, which may include both fixed and variable costs but do not specifically address the definition of variable costs.