Entrepreneurship and Small Business (ESB) Certification Practice Exam

What type of costs are directly associated with the production of products sold?

1. Fixed costs

2. Variable costs

3. Indirect costs

4. Opportunity costs

The correct answer is: Variable costs

The choice of variable costs is correct because variable costs are expenses that fluctuate in direct proportion to the production output. As a business produces more products, these costs increase, and when production decreases, the costs decline accordingly. Examples of variable costs include raw materials, labor directly involved in the production process, and utilities for operating machinery—all of which are incurred based on the volume of production. In contrast, fixed costs remain constant regardless of production levels; they include expenses like rent, salaries of permanent staff, and equipment leases. These do not vary with the amount of goods produced. Indirect costs, which are not directly tied to the production of specific products, can include administrative expenses or marketing costs. Opportunity costs represent the potential benefits missed out on when one alternative is chosen over another, which does not directly relate to production costs. Thus, variable costs, being directly associated with product production, accurately reflect the costs that vary with the level of output.