Question

Which best describes costs that vary in total directly and proportionately with changes in the activity level?

a) Fixed costs
b) Variable costs
c) Semi-variable costs
d) Overhead costs

Answer 1

Variable costs are the costs that vary in total directly and proportionately with changes in the activity level.

Step-by-step explanation:

Variable costs are the costs of the variable inputs (e.g., labor). The only way to increase or decrease output is by increasing or decreasing the variable inputs. Therefore, variable costs increase or decrease with output. We treat labor as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials.