What are variable costs in a business?

Variable costs are expenses that fluctuate based on the level of production or sales activity within a business. This means that as a company increases its output, variable costs will also increase because they are directly tied to the volume of goods produced or services provided. For example, costs of raw materials, direct labor associated with manufacturing, and utility expenses that rise with production are all considered variable costs.

This concept is important for businesses as it aids in budgeting and financial forecasting, allowing companies to assess how changes in production levels will impact overall costs and profitability. Understanding variable costs helps businesses manage their resources more effectively and make informed decisions when scaling operations.

The other choices refer to fixed expenses, specific types of costs like marketing, or initial investments, which do not relate to the nature of variable costs.