What is the difference between fixed costs and variable costs?

The correct choice correctly defines fixed costs and variable costs. Fixed costs refer to expenses that do not change with the level of production or sales volume. This means that whether a business produces a large or small quantity of goods, fixed costs—such as rent, salaries, and insurance—remain constant over a specific period.

On the other hand, variable costs change directly in line with production or sales levels. This includes costs such as raw materials and direct labor costs, which increase as production increases and decrease when production decreases.

This understanding is crucial for businesses as it affects budgeting, financial forecasting, and overall cost management strategies. Recognizing the stability of fixed costs allows managers to make informed decisions regarding scaling operations or investing in new projects without the fluctuation of this expense impacting their calculations.