Which statement best defines "variable costs"?

The statement that "variable costs are costs that increase as production increases" accurately captures the essence of what variable costs are in the context of business expenses. Variable costs are expenses that fluctuate in direct proportion to the volume of goods or services produced. This means that as a company scales its production upwards, the variable costs associated with producing those additional units increase correspondingly.

For instance, if a business produces more products, it will likely incur higher costs for materials, labor, and utilities that are directly tied to that production process. This characteristic distinguishes variable costs from fixed costs, which remain constant regardless of production levels. Understanding this distinction is crucial for budgeting, forecasting, and pricing strategies, as businesses need to account for how these costs will impact profitability as they change their levels of production.