How are fixed costs differentiated from variable costs?

Fixed costs are characterized by their consistency regardless of the level of production. This means that, despite fluctuations in output, these costs do not change and must be paid irrespective of how much or how little is produced. Examples of fixed costs include rent, salaries for permanent staff, and insurance.

On the other hand, variable costs fluctuate in direct correlation with production volume. This means that as production increases, total variable costs will also rise, and conversely, if production decreases, variable costs will drop. Common examples of variable costs include raw materials, direct labor related to production, and some utilities, which can vary based on the level of activity.

The other options present misunderstandings of these fundamental cost concepts. For example, the notion that fixed costs vary with production levels is incorrect, as it contradicts the essence of fixed costs being constant. While it may be true in some cases that fixed costs could exceed variable costs, this is not a defining characteristic. Moreover, the categorization of fixed costs as exclusively related to labor or variable costs being limited to raw materials also misrepresents their definitions, as both types of costs can encompass a broader range of expenses.