Which costs are characterized as variable costs?

Variable costs are expenses that change in direct proportion to the level of production or sales. This means that as a company produces more goods or services, the total variable costs will increase, while if production decreases, these costs will decrease as well.

In this scenario, direct labor and raw materials are classified as variable costs because they directly correlate with production volume. For example, if a company produces more units, it will need more raw materials and may require additional labor to meet the higher production demand, leading to an increase in costs. Conversely, when production slows, the need for both raw materials and direct labor decreases, aligning their costs with production levels.

Other options listed describe costs that are either fixed or do not vary with production volume. Interest payments and salaries can be fixed costs depending on the structure of employment (e.g., salaries paid regardless of hours worked), fixed overhead expenses do not vary with production levels, and rent and depreciation typically remain constant regardless of output levels. This differentiation helps in understanding how businesses can manage costs effectively based on their operational needs and production strategies.