Which of the following best describes variable costs?

Variable costs are defined as expenses that change in direct correlation with the level of production or service activity. This means that as production increases, the total variable costs will also increase proportionately, and conversely, if production decreases, the variable costs will decrease. This characteristic is essential for budgeting and financial forecasting, as it allows businesses to predict costs accurately based on production levels.

In contrast, the other statements do not accurately reflect the nature of variable costs. For example, stating that variable costs remain constant regardless of production does not align with their fundamental property of fluctuating with output levels. Similarly, claiming that variable costs pertain only to administrative expenses misunderstands their application, as variable costs typically include costs such as materials and labor directly tied to production. Finally, asserting that variable costs are always lower than fixed costs does not hold true, as there are situations where variable costs can exceed fixed costs, depending on production scenarios and business models.