Which type of costs vary directly with the level of business activity or production?

Variable costs are expenses that change in direct proportion to the level of business activity or production. For instance, in a manufacturing business, costs for raw materials, direct labor, and certain utilities are considered variable costs because they increase as production increases and decrease when production decreases. This characteristic allows businesses to effectively manage their spending based on the volume of goods or services they are producing.

In contrast, fixed costs remain constant regardless of the level of production. These include expenses such as rent, salaries of permanent staff, and insurance. Overhead costs refer to ongoing business expenses that are not directly attributed to creating a product or service and can include both fixed and variable components. Semivariable costs have both fixed and variable elements, meaning they have a base cost but can increase with higher levels of production.

By understanding variable costs, businesses can conduct break-even analysis and make more informed decisions about pricing, budgeting, and scaling operations. This knowledge is vital for maintaining profitability and financial stability.