Which of the following best defines variable costs?

Variable costs are best defined as costs that fluctuate with the level of production and sales. This means that as a company increases its production, the total variable cost also increases because these costs are directly tied to the volume of output. Examples of variable costs include direct materials, direct labor, and any expenses directly associated with the production process that vary with the level of production activity.

In contrast, other options depict different cost categories. Fixed costs, for example, remain constant regardless of production levels, signifying costs that a business must pay irrespective of the amount it produces, such as rent or salaries of permanent staff. Bulk purchasing leads to cost savings, but those savings themselves are not a type of cost – they reflect a discount rather than the nature of a variable cost. Upfront costs incurred before production starts refer to preliminary costs like research and development or setup costs and do not vary with production levels, thereby separating them from the definition of variable costs.