Which term describes costs that change based on business conditions?

Variable costs are those expenses that fluctuate in direct correlation to the level of production or business activity. This means that if a company increases its production, the variable costs will also rise, reflecting the additional resources required, such as raw materials, labor, and utilities. Conversely, if production decreases, variable costs will drop correspondingly.

In contrast, fixed costs remain constant regardless of production levels. These include expenses such as rent, salaries, and insurance, which are incurred even when production is not taking place. Capital costs relate specifically to the investment in long-term assets, while operational costs encompass both fixed and variable expenses involved in daily operations. The distinguishing characteristic of variable costs is their direct link to changes in business conditions and output levels.