DECA Financial Consulting Practice Exam 2025 - Free DECA Financial Consulting Practice Questions and Study Guide

The main distinction between fixed and variable costs revolves around how they react to changes in production levels. Variable costs are those that fluctuate directly in response to the quantity of goods produced. For instance, costs such as raw materials, direct labor, and other expenses associated with production will increase as more units are made and decrease when production slows down. This characteristic makes variable costs integral to understanding a business's financials, as they can significantly affect overall profitability depending on the level of output.

In contrast, fixed costs remain constant regardless of the production volume. These costs relate to expenses that do not vary with production, such as rent, salaries of permanent staff, and insurance. They must be paid regardless of whether the business produces one unit or thousands. Understanding the behavior of these costs is essential for effective budgeting, forecasting, and financial planning in business strategies.