Question

What describes variable costs in terms of cost behaviour?

1. They stay constant regardless of changes in activity.
2. They change proportionally with changes in activity levels.
3. They include both direct and indirect components.
4. They are fixed in nature.

Options

• 1. & 2.

• 3. & 4.

• Only 1.

• 2. & 3.

Answer 1

2. & 3.

Explanation:

• Statement 2 is correct because total variable costs vary in a direct, linear proportion to changes in production or sales activity levels.
• Statement 3 is correct because variable costs can include both direct elements (such as raw materials and production line piece-rate labor) and indirect elements (such as factory electricity, power consumption, or indirect materials that scale up with output volume).