Which statement best differentiates fixed and variable costs with examples?

Which statement best differentiates fixed and variable costs with examples?

• A. Both fixed and variable costs change with production equally.
• B. Fixed costs remain constant in the short term (e.g., rent); variable costs change with output (e.g., direct materials).
• C. Fixed costs vary with output; variable costs stay constant.
• D. Only fixed costs matter in CVP.

Answer: (B)

Costs are classified by how they behave as production changes. Fixed costs stay the same in the short term regardless of how much you produce—think of rent, insurance, or permanent salaries. They don’t rise or fall with output within that time frame. Variable costs, by contrast, vary directly with production. The more you manufacture, the more you incur in things like direct materials or direct labor tied to those units. So the statement that fixed costs remain constant in the short term (rent) and variable costs change with output (direct materials) best captures this difference. The other ideas misstate how costs behave: fixed costs don’t vary with output, and CVP analysis relies on both fixed and variable costs, not just fixed costs.

Costs are classified by how they behave as production changes. Fixed costs stay the same in the short term regardless of how much you produce—think of rent, insurance, or permanent salaries. They don’t rise or fall with output within that time frame. Variable costs, by contrast, vary directly with production. The more you manufacture, the more you incur in things like direct materials or direct labor tied to those units.

So the statement that fixed costs remain constant in the short term (rent) and variable costs change with output (direct materials) best captures this difference. The other ideas misstate how costs behave: fixed costs don’t vary with output, and CVP analysis relies on both fixed and variable costs, not just fixed costs.