Which of the following best distinguishes between fixed costs and variable costs?

The correct choice highlights the fundamental distinction between fixed costs and variable costs, which is essential in financial management and budgeting.

Fixed costs are expenses that do not change with the level of production or sales activity. They remain constant regardless of how much or how little a company produces, making them predictable and stable over a certain range of activity. Common examples include rent, salaries of permanent staff, and insurance premiums.

On the other hand, variable costs are directly associated with the level of production; they fluctuate as production levels change. As a company makes more products, variable costs increase (such as costs for raw materials and direct labor that varies with output), and conversely, they decrease when production slows.

Recognizing this distinction is critical for effective financial planning and analysis, as it impacts decisions related to pricing, budgeting, and financial forecasting.