Ace the DECA Financial Consulting Challenge 2026 – Unleash Your Business Superpower!

The distinction between fixed costs and variable costs lies primarily in how they behave in relation to production levels. Fixed costs remain consistent and do not fluctuate with the volume of goods or services produced. This means that regardless of whether a company is producing many items or none at all, its fixed costs—such as rent, salaries, and insurance—stay the same over a specific period of time.

In contrast, variable costs vary directly with production levels. For instance, costs for raw materials and direct labor increase as more products are made and decrease if production stops. Understanding this difference is crucial for financial planning and budgeting, as it allows businesses to predict how changes in production will impact overall costs.

The other options do not accurately convey this fundamental concept. Fixed costs are not necessarily higher than variable costs, as the relationship between these two types of costs can vary by business. Variable costs can change depending on production but are not correct to say they never change. Moreover, variable costs are not determined by fixed costs; instead, they are influenced by the level of output produced.