Which of the following is a variable cost?

• A. Wages, utilities, commissions, raw materials, shipping
• B. Land rent and building depreciation
• C. Advertising costs
• D. Insurance premiums

Answer: (A)

Variable costs change with how much you produce or sell. They rise as production volume increases and fall when production decreases. Wages can vary with the amount of labor needed for output, utilities typically grow with machinery use and production activity, commissions depend on sales volume, raw materials are consumed in proportion to the quantity produced, and shipping costs usually increase with the amount of product shipped. Because each of these fluctuates directly with production or sales, they’re considered variable costs.

Land rent and building depreciation are fixed costs—they don’t change with production in the short term. Advertising costs can be fixed or variable depending on the campaign, but are often set in advance and don’t move with production level. Insurance premiums are typically fixed for a period.