Which of the following describes a cost that changes with production levels?

The correct choice identifies variable costs, which are expenses that fluctuate in direct proportion to changes in production levels. As a business increases its production, it needs more inputs—such as materials, labor, and utilities—resulting in higher total costs. Conversely, when production decreases, these costs also drop correspondingly.

Variable costs are critical in understanding how a company manages its production and pricing strategies, as they influence the marginal cost of producing additional units. They provide insight into the operational flexibility of a company since these costs can be adjusted based on production volume.

In contrast, fixed costs remain constant regardless of production levels. These include expenses like rent and salaries, which do not change as output varies. Total costs, while encompassing both fixed and variable costs, do not specifically address the costs that change with production, and average costs are calculated per unit of output rather than being defined by their behavior in relation to production levels.