Question

Give two examples of variable costs.

Hint:

Variable costs change with the level of output produced. Examples include raw materials, labor, and energy costs. These costs rise as production increases and fall when production decreases.

Answer 1

Step 1: Understanding Variable Costs:
Variable costs are costs that vary directly with the level of production. As a firm increases production, variable costs also increase, and as production decreases, these costs decrease. These costs are typically incurred for inputs that are used in the production process and whose amount can be adjusted with the level of output.
Step 2: Identifying Two Common Examples of Variable Costs:
- Raw materials cost: Raw materials are necessary for production, and their costs change based on how much is produced. For example, the cost of wood for a furniture manufacturer will increase as more furniture is produced.
- Labor cost: This refers to the wages or salaries paid to workers. As the number of workers or the working hours increases, labor costs rise, and as the production level decreases, labor costs fall. For instance, paying workers based on the number of units produced or on an hourly basis results in a variable labor cost.
Step 3: Key Characteristics of Variable Costs:
Variable costs are directly tied to the firm’s output level and are typically incurred in the production process. As the firm’s output fluctuates, variable costs follow a similar pattern. These costs are essential for scaling up or down production.
Step 4: Final Conclusion:
Two examples of variable costs include the cost of raw materials and labor costs. Both change in direct proportion to the level of production.