What type of costs vary directly with a company's level of activity?

Variable costs are expenses that change in direct proportion to the level of production or business activity. As a company increases its output, these costs, such as materials, labor directly involved in production, and utilities, will rise. Conversely, if production decreases, variable costs will decline as well. This direct correlation makes them essential for understanding how costs behave in response to activity levels, allowing management to make more informed decisions regarding budgeting and forecasting.

Fixed costs, on the other hand, remain constant regardless of activity level, while sunk costs are past expenditures that cannot be recovered and should not influence current decision-making. Contingent costs are not directly tied to a particular level of activity but are dependent on certain future events occurring. Understanding these distinctions is critical for analyzing a company's cost structure and financial performance.