Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which of the following is considered a variable cost?

1. Mortgage payment

2. Repairs and maintenance

3. Ingredients for products

4. Office lease

The correct answer is: Ingredients for products

The concept of variable costs in a business context refers to expenses that change in direct proportion to the level of production or sales. When production increases, variable costs tend to rise; conversely, when production decreases, these costs drop as well. In this context, ingredients for products are classified as variable costs because they are directly tied to the amount produced. For a bakery, for example, the more bread that is produced, the greater the quantity of flour, sugar, and other ingredients required. Therefore, if production doubles, the costs for these ingredients will also double, clearly illustrating the variable nature of these costs. On the other hand, other expenditures listed, such as mortgage payments, repairs and maintenance, and office lease payments, remain relatively fixed regardless of the level of production or sales). Mortgage payments and lease agreements typically have fixed monthly payments, making them fixed costs. Repairs and maintenance can vary based on usage, but they don't fluctuate in direct relation to production in the same way that ingredients do, thus they are more closely associated with fixed or semi-variable costs rather than being purely variable.