What is a defining characteristic of variable costs?

Variable costs are defined by their direct relationship to production levels. As production increases, variable costs rise accordingly because they fluctuate with the volume of goods or services produced. This means that when a company produces more, it incurs additional costs for materials, labor, or other resources that vary based on how much is being produced. For instance, if a manufacturing business produces more items, it will need to purchase more raw materials and may require more labor hours, thus leading to higher variable costs.

In contrast, fixed costs do not change with production levels; they remain constant regardless of how much is produced. This distinction is crucial in understanding how a business's costs behave under different levels of activity, making up a fundamental aspect of cost accounting and financial analysis. Variable costs can also be seen in other contexts, such as utilities or shipping, where usage directly correlates to the level of production or sales activity.