Which type of cost changes with an increase or decrease in production output?

Variable cost is defined as costs that change in direct proportion to changes in production output. This means that as a company increases production, variable costs, such as raw materials and labor directly associated with production, will rise. Conversely, if output decreases, these costs will decrease as well.

In contrast, fixed costs remain constant regardless of production levels. These include expenses like rent or salaries of permanent staff, which do not fluctuate with the amount of goods produced.

Total cost encompasses both fixed and variable costs; therefore, while it will change with production output, the component that specifically drives that change is the variable cost. Opportunity cost relates to the potential benefits lost from the next best alternative when a decision is made, which is not directly influenced by production output levels.

Understanding the interaction of these costs is crucial for businesses when planning production and budgeting effectively.