Which of the following best describes variable costs?

Variable costs are best described as costs that directly correlate with production levels. This means that as production increases or decreases, these costs will rise or fall accordingly. For example, materials, labor directly involved in production, and some utilities might increase as more products are manufactured. Thus, the total variable cost changes in direct relation to the level of output produced.

In contrast, other options highlight characteristics of costs that do not fit the definition of variable costs. The first option refers to fixed costs, which remain constant regardless of production changes. The third option describes sunk costs or fixed obligations that must be paid irrespective of output. Finally, the last option describes fixed costs as well, emphasizing that they do not vary with sales volume. Understanding this distinction helps in analyzing how costs behave in relation to production and sales levels, which is critical for decision-making in accounting.