Which of the following best describes the difference between variable costs and fixed costs?

• A. Variable costs are related to administrative expenses, while fixed costs are related to selling expenses.
• B. Variable costs remain constant per unit and in total, while fixed costs fluctuate with production levels.
• C. Variable costs are only incurred when a company makes a profit, while fixed costs are only incurred when there is a loss.
• D. Variable costs change in total with the level of sales or production, while fixed costs remain constant regardless of sales volume.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of variable costs. Variable costs are expenses that change in total based on the level of production or sales. Examples include direct materials and direct labor costs.
2. Step 2: Understand the concept of fixed costs. Fixed costs are expenses that remain constant in total regardless of the level of production or sales. Examples include rent, salaries, and insurance.
3. Step 3: Compare the behavior of variable costs and fixed costs. Variable costs fluctuate in total with changes in production or sales volume, while fixed costs do not change in total even if production or sales volume changes.
4. Step 4: Eliminate incorrect options based on the definitions. For example, variable costs are not related to administrative expenses, nor do they only occur when a company makes a profit. Fixed costs do not fluctuate with production levels.
5. Step 5: Identify the correct description. The correct answer is that variable costs change in total with the level of sales or production, while fixed costs remain constant regardless of sales volume.