FOB105 Financial Management Body of Knowledge (FMBOK) Practice Exam

The characteristic that illustrates a variable cost is the cost of raw materials used in production. Variable costs are costs that change in direct proportion to the level of production or sales volume. As more units are produced, the cost of raw materials increases because more materials are required. Conversely, if production decreases, the cost of raw materials decreases as well. This relationship exemplifies the nature of variable costs as their total fluctuates based on the activity level.

In contrast, the cost of insurance, monthly rent payments, and salaries of permanent employees are generally considered fixed costs. These costs do not vary directly with the level of production or sales; they remain constant regardless of the business activity level. For instance, insurance premiums are paid at a predetermined rate, rent is a fixed expense for a given period, and salaries for permanent employees do not fluctuate based on production levels. Understanding these distinctions is essential for effective financial management, particularly in budgeting and forecasting scenarios.