A cost that increases with activity and decreases when activity falls is called what?

A cost that increases with activity and decreases when activity falls is called what?

• A. Fixed expense
• B. Sunk cost
• C. Operating expense
• D. Variable expense

Answer: (D)

Costs that change with how much you do are called variable expenses. As activity increases, you need more inputs like materials and direct labor, so total variable costs rise; as activity decreases, those inputs are used less, and the total falls. That direct link to activity level is what defines a variable expense. Fixed expenses, by contrast, stay the same across activity levels; sunk costs are past costs that can’t be recovered, and operating expenses is a broad category that can include both fixed and variable items, so it doesn’t specifically describe costs that move with activity.

Costs that change with how much you do are called variable expenses. As activity increases, you need more inputs like materials and direct labor, so total variable costs rise; as activity decreases, those inputs are used less, and the total falls. That direct link to activity level is what defines a variable expense. Fixed expenses, by contrast, stay the same across activity levels; sunk costs are past costs that can’t be recovered, and operating expenses is a broad category that can include both fixed and variable items, so it doesn’t specifically describe costs that move with activity.