Which statement best describes fixed costs vs variable costs?

• A. Fixed costs vary with output and are not constant.
• B. Fixed costs stay constant regardless of output; variable costs change with production volume.
• C. Both fixed costs increase with output.
• D. Fixed costs are only incurred after a certain level of output.

Answer: (B)

Costs behave differently as production changes. The main idea is fixed costs stay the same regardless of how much you produce, while variable costs rise or fall directly with how much you produce.

Fixed costs are incurred even if you produce nothing—things like rent, property taxes, and permanent salaries. They don’t change with the level of output in the relevant range. In contrast, variable costs depend on activity: direct materials, direct labor tied to production, and utilities used in manufacturing increase as output grows (and decrease if you cut production).

So the statement that fixed costs stay constant regardless of output and variable costs change with production volume best captures these cost behaviors. The other options misstate how fixed costs behave (they don’t vary with output), suggest that both types rise with output (fixed costs don’t), or imply fixed costs only kick in after a certain level of production (not true for standard fixed costs).