Which term describes costs that change with the level of production?

Variable costs represent expenditures that fluctuate directly in relation to the quantity of goods or services produced. As production increases, variable costs rise because more materials, labor, or resources are required to produce additional units. Conversely, when production slows or decreases, variable costs decline accordingly. This relationship is crucial for managers in understanding how costs behave within different levels of production, which ultimately aids in budgeting, forecasting, and decision-making.

In contrast, fixed costs remain constant regardless of the production levels, such as rent or salaries. Direct costs relate directly to a specific product and can include both variable and fixed costs, while indirect costs are associated with multiple products or services. Understanding the distinction and behavior of variable costs is vital for effective managerial accounting and operational efficiency.