Which term describes expenses that fluctuate according to the level of production?

Variable costs are expenses that change in direct proportion to the level of production or output. This means that as a company increases its production, variable costs will increase, and conversely, if production decreases, these costs will also decrease. Common examples of variable costs include raw materials, direct labor costs associated with production, and utilities that vary with production volume. Understanding the nature of variable costs is crucial for businesses as it helps in budgeting and financial forecasting, enabling better decision-making regarding scaling operations up or down.

In contrast, fixed costs remain constant regardless of the level of production, which could lead to confusion if one does not differentiate between the two. Implicit costs refer to the opportunity costs of using resources for one purpose over another, and external costs are those that affect third parties who are not directly involved in a transaction. Thus, identifying expenses that vary with production is key to effective cost management and pricing strategies.