A cost that increases or decreases in direct proportion to sales is known as a

A cost that increases or decreases in direct proportion to sales is known as a

• A. Fixed cost
• B. Variable cost
• C. Sunk cost
• D. Marginal cost

Answer: (B)

Costs are grouped by how they respond to changes in sales. A cost that rises or falls in direct proportion to sales is a variable cost, because total variable cost moves with the level of activity. As you sell more units, you incur more cost; as you sell fewer, it decreases. This typically includes items directly tied to production and sales, like materials and direct labor, which scale with volume. Fixed costs stay the same across the relevant range, such as rent or a salaried supervisor, regardless of sales. Sunk costs are money already spent and not recoverable, so they don’t change with current or future sales. Marginal cost is the cost of producing one additional unit, a specific incremental cost rather than the overall behavior of all costs with changes in sales. So the cost described is variable cost.

Costs are grouped by how they respond to changes in sales. A cost that rises or falls in direct proportion to sales is a variable cost, because total variable cost moves with the level of activity. As you sell more units, you incur more cost; as you sell fewer, it decreases. This typically includes items directly tied to production and sales, like materials and direct labor, which scale with volume. Fixed costs stay the same across the relevant range, such as rent or a salaried supervisor, regardless of sales. Sunk costs are money already spent and not recoverable, so they don’t change with current or future sales. Marginal cost is the cost of producing one additional unit, a specific incremental cost rather than the overall behavior of all costs with changes in sales. So the cost described is variable cost.