Question

Which of the following is considered a variable cost?

• A. Rent of building
• B. Salary of permanent staff
• C. Cost of raw materials
• D. Insurance premium

Hint:

Ask yourself: "If I stop production today, do I still have to pay this?" If the answer is "No," it’s a Variable Cost.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Costs are divided into Fixed Costs and Variable Costs. Variable costs are those that change directly with the level of output.

Step 2: Detailed Explanation:

• Variable Cost (VC): If you produce more, you need more raw materials. If you produce zero, the cost of raw materials is zero. Hence, it is a variable cost.
• Fixed Costs (FC): Rent (A), permanent salaries (B), and insurance (D) must be paid even if the factory produces nothing. These do not change with the level of production in the short run.

Step 3: Final Answer:
The cost of raw materials is a variable cost.