What is meant by 'variable cost' in the context of business?

Variable costs refer to expenses that vary directly with the level of production or sales volume. This means that as a business increases its production, the total variable costs will increase, and conversely, when production decreases, these costs will go down. Examples of variable costs include raw materials, labor directly involved in production, and utility costs that may fluctuate based on usage.

Understanding that variable costs change in relation to business activity is essential for effective budgeting and financial planning. This concept is critical for businesses to maintain a clear picture of their cost structure, helping them to analyze profitability and make informed decisions about scaling operations.