What does the term variable costs refer to in break-even analysis?

In break-even analysis, variable costs refer to expenses that fluctuate based on the level of output or production. This means that as more units are produced or sold, the total variable costs will increase because they are directly tied to the quantity of goods or services being manufactured or delivered. For example, materials, labor costs, and utilities required for production are considered variable costs since they change in proportion to the level of output.

Understanding variable costs is crucial for businesses and managers as they help determine the break-even point—the point at which total revenues equal total costs, resulting in no profit or loss. By analyzing variable costs, a business can make informed decisions about pricing, production levels, and financial forecasting.