Which type of cost varies directly with a change in production volume?

Variable costs are expenses that change in direct proportion to changes in production volume. This means that as production increases, the total variable costs also increase, and conversely, if production decreases, the total variable costs will decrease. This relationship is crucial for budgeting and financial forecasting in any production environment, as it allows businesses to predict how cost structures will fluctuate with production levels.

In contrast, fixed costs remain constant regardless of the production volume, meaning they do not vary with output; they remain the same even when production scales up or down. Overhead costs can include both fixed and variable costs and typically refer to ongoing expenses that are not directly tied to production levels. Indirect costs also do not directly correlate with production volume and may include items like administrative and marketing expenses that are not tied to a specific level of output.

Understanding which costs are variable helps in analyzing the cost behavior of a business, pricing products, and making decisions about scaling production.