What does the term 'variable costs' encompass?

Variable costs refer to expenses that change in direct proportion to the level of production or sales volume. This means that as a company increases its output, variable costs, such as raw materials, labor, and utilities directly tied to production, will also rise. Conversely, if production decreases, these costs will decline accordingly. Understanding this concept is crucial for businesses as it helps in budgeting, forecasting, and making decisions regarding pricing and production levels.

The other concepts relate to either fixed costs, which do not vary with output, or costs that may not be recorded in financial reports, which do not align with the definition of variable costs.