Entrepreneurship and Small Business (ESB) Certification Practice Exam

What type of costs vary directly with the volume of production?

1. Fixed costs

2. Variable costs

3. Overhead costs

4. Additional costs

The correct answer is: Variable costs

Variable costs are expenses that change in direct proportion to the volume of production. This means that as a business produces more goods or services, the total variable costs increase, and conversely, if production decreases, these costs decline. Common examples of variable costs include raw materials, direct labor costs directly associated with production, and utility costs that vary with production levels. In contrast, fixed costs remain constant regardless of the level of production, like rent or salaries of permanent staff. Overhead costs typically incorporate both fixed and variable components and are not solely dependent on production volume. Additional costs is a more general term that does not specifically address how costs relate to production levels. Thus, variable costs are specifically linked to the volume of production, making them the correct choice.