What type of cost fluctuates in accordance with the level of production or sales revenue?

Variable costs are expenses that change directly in relation to the level of production or sales revenue. As production increases, variable costs rise because they are incurred with each unit manufactured, such as materials needed for production or direct labor costs tied to that manufacturing. Conversely, if production decreases, these costs diminish accordingly.

This behavior makes variable costs essential for businesses in forecasting and budgeting since they allow management to predict how changes in production volumes will impact overall expenses. Understanding variable costs helps businesses make informed decisions regarding pricing, production levels, and cost management to maximize profitability.