Question

The best example of variable cost is

• A. Interest on capital
• B. Material cost
• C. Wealth tax
• D. Rent

Hint:

To distinguish between fixed and variable costs, ask yourself: "If the company produces one more unit, will this specific cost increase?" If the answer is yes, it's a variable cost. If it stays the same, it's a fixed cost.

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
The question asks to identify the best example of a variable cost from the given options. A variable cost is a cost that changes in direct proportion to the level of production or business activity.
Step 2: Analysis of Options:
Let's analyze each option to determine if it is a variable or fixed cost.

(A) Interest on capital: This is generally a fixed cost. The interest payment on borrowed capital (like loans) does not typically change with the volume of production in the short term.

(B) Material cost: The cost of raw materials used in production is a classic example of a variable cost. If a company produces more units, it will need to purchase more raw materials, and the total material cost will increase proportionally.

(C) Wealth tax: This is a tax on an individual's or entity's net worth. It is not related to the level of production and is considered a fixed expense or a non-operating expense.

(D) Rent: Rent for a factory or office space is a fixed cost. The rental amount remains the same each month, regardless of how many units are produced.

Step 3: Final Answer:
Based on the analysis, material cost is the only cost that directly varies with the level of production. Hence, it is the best example of a variable cost.