Which statement correctly describes a variable cost?

• A. Tends to vary directly with output; total variable cost increases as output increases.
• B. The total cost per unit remains fixed as output changes.
• C. It is fixed within a relevant range and becomes variable outside it.
• D. It is incurred only when production occurs.

Answer: (A)

Variable costs are costs that change in total as the level of production changes. As you produce more, you incur more of these costs (materials, direct labor, etc.), so the total variable cost increases; if you cut output, it decreases. So the statement that variable costs tend to vary directly with output, with total variable cost increasing as output increases, is the correct description because it directly expresses this proportional relationship between activity and cost.

The other statements don’t fit. Saying the total cost per unit remains fixed as output changes ignores how fixed costs per unit change with output and that the total cost per unit isn’t constant overall. Describing variable costs as fixed within a relevant range and variable outside it doesn’t reflect the typical behavior of variable costs, which vary with activity rather than switching between fixed and variable across ranges. And while variable costs are incurred when production occurs, the essential point is that the total amount varies with output—the direct link to output is what defines a variable cost.