Which statement describes the difference between fixed and variable costs?

The distinction between fixed and variable costs is crucial for understanding cost behavior in relation to production levels. Fixed costs are expenses that do not change in total regardless of the volume of goods or services produced within a relevant range. This could include costs such as rent, salaries of permanent staff, and insurance. Whether a company produces a thousand units or ten thousand, these costs will remain the same.

On the other hand, variable costs fluctuate directly with production volume. This includes costs such as raw materials, direct labor costs associated with production, and utilities linked to manufacturing activities. If production increases, variable costs will increase as well, and if production decreases, these costs will drop accordingly.

By outlining this fundamental characteristic of fixed costs remaining constant and variable costs fluctuating with production volume, one can effectively analyze and manage business expenses, making the correct choice clear in the context of cost accounting.