What are considered variable costs?

Variable costs are those expenses that change in direct relation to the level of production. For instance, if a company produces more products, it will typically need to purchase more raw materials, which increases the total cost. Conversely, if production decreases, the costs for these materials will also decrease. This characteristic of variable costs makes them essential for budgeting and forecasting, as they directly affect the overall cost of goods sold and profitability based on production volumes. Understanding variable costs is critical for managers when making decisions about scaling production up or down.