A variable cost is an expense that changes in proportion to the level of output or activity in a business. Unlike fixed costs, which remain constant regardless of production levels, variable costs fluctuate with the rate of production. Common examples of variable costs include raw materials, direct labor costs (if paid per unit produced), and sales commissions. These costs are directly tied to the production volume; as production increases, the variable costs will also increase, and vice versa. Understanding variable costs is crucial for businesses to accurately calculate the break-even point and to make informed pricing, budgeting, and operational decisions.

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