Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which of these would typically be categorized as a variable cost?

1. Rent

2. Credit card bill

3. Ingredients

4. Insurance

The correct answer is: Ingredients

Variable costs are expenses that fluctuate with the level of production or sales activity. They increase as production increases and decrease as production decreases. Ingredients are a prime example of this type of cost because they are required for manufacturing products. As higher quantities of the product are made, more ingredients are needed, which directly ties the cost of ingredients to production volume. In contrast, rent tends to be a fixed cost, as it remains the same regardless of how much is produced or sold. A credit card bill can vary depending on how much is charged each month, but it is not directly tied to production, making it less straightforward to classify as a variable cost. Similarly, insurance is generally considered a fixed cost because it is usually billed at a set rate over a specific time period, regardless of the level of business activity. Therefore, among the options, ingredients clearly align with the characteristics of variable costs.