NCEA Level 1 Business Studies Practice Test

The correct answer is variable costs because they are directly linked to the production levels of goods. Whenever a business produces more products, the costs associated with those products increase proportionally. For instance, if a manufacturer produces more units of a product, it will incur additional expenses for raw materials, labor directly involved in production, and other related costs that fluctuate with production volume.

In contrast, fixed costs remain constant regardless of the level of production; these include rent, salaries of permanent staff, and other expenses that do not change with the volume of goods produced. Budgeting refers to the process of creating a plan to allocate finances, while an income statement is a financial report that summarizes revenues and expenses over a specific period of time. Understanding the distinction between fixed costs and variable costs is crucial for effective financial planning and analysis in business operations.