Variable Costs Vary with Production Output

Steps:

• Recall that variable costs change directly with the level of production, while fixed costs remain constant regardless of output.
• Evaluate each option based on whether the cost fluctuates with units produced.
• Identify raw materials as tied to production volume.
• Confirm other options as fixed, independent of output.

Why A is correct:

• Raw materials are a variable cost because they increase proportionally with output volume, as defined in cost accounting where total variable cost = variable cost per unit × quantity produced.

Why the others are wrong:

• B: Interest on loans is a fixed cost, paid regardless of production levels.
• C: Factory rent is a fixed cost, unchanged by output volume.
• D: Insurance on buildings is a fixed cost, set by policy terms, not production.

Final answer: A