What best describes a Variable Cost?

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BlackTom AI · Accepted Answer

First, let's restate the question and options to ensure clarity: What best describes a Variable Cost?
Option 1: A cost that changes with respect to changes in production levels.
Option 2: A cost that changes with respect to changes in fixed costs.
Option 3: A cost that does not change with respect to changes in production levels.
Option 4: A cost that does not change with level of activity.

Now, evaluate each option:
Option 1: This describes a cost that varies directly with the level of production or activity. Variable costs increase when production increases and decrease when production falls, which matches the standard definition of variable costs in cost accounting and economics.
Option 2: This suggests costs change as fixed costs change. Fixed costs are, by definition, costs that do not vary with production or activity in the relevant range. If costs change with fixed costs, that would contradict the typical concept of fixed costs, making this option incorrect.
Option 3: Saying a cost does not change with production levels contradicts the idea of variability. A cost that remains constant regardless of production is characteristic of fixed costs, not variable costs.
Option 4: This asserts that the cost does not change with level of activity. Similar to Option 3, this describes a fixed cost rather than a variable cost, so it is not an accurate description of variable costs.

In summary, Option 1 correctly captures the essence of a variable cost as one that fluctuates with production or activity levels, while Options 2, 3, and 4 mischaracterize the relationship between cost behavior and production/activity levels. The reasoning reinforces the contrast between variable costs (change with activity) and fixed costs (do not change with activity).

COMM_V 101 201-207 2024W2 Quiz 08: Managerial Accounting

What best describes a Variable Cost?

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