Which cost category changes in total with the level of business activity?

Which cost category changes in total with the level of business activity?

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

Answer: (C)

Costs behave differently as activity changes. The one that changes in total with the level of activity is the variable expense. As production or sales rise, more input is needed—materials, direct labor, and other variable components—so total variable costs increase in direct proportion to activity. The cost per unit of these variables stays roughly constant, which is why the total amount varies with how much you produce or sell. In contrast, fixed costs stay the same in total within the relevant range regardless of activity, and sunk costs have already been incurred and don’t change with current activity. So the category that shifts in total as activity changes is the variable expense.

Costs behave differently as activity changes. The one that changes in total with the level of activity is the variable expense. As production or sales rise, more input is needed—materials, direct labor, and other variable components—so total variable costs increase in direct proportion to activity. The cost per unit of these variables stays roughly constant, which is why the total amount varies with how much you produce or sell. In contrast, fixed costs stay the same in total within the relevant range regardless of activity, and sunk costs have already been incurred and don’t change with current activity. So the category that shifts in total as activity changes is the variable expense.