Entrepreneurship and Small Business (ESB) Certification Practice Exam

What type of cost is an electric bill considered if it varies month to month?

1. Fixed cost

2. Variable cost

3. Opportunity cost

4. Sunk cost

The correct answer is: Variable cost

An electric bill that varies month to month is considered a variable cost because it changes based on usage. Variable costs are expenses that fluctuate in direct proportion to the level of business activity or operations. For instance, as a business operates more machinery or increases its activities, its electricity usage generally rises, leading to a higher bill. Conversely, during slower months, the usage and subsequent costs may decrease. Fixed costs, on the other hand, remain constant regardless of the level of operational activity, such as rent or salaries. Opportunity costs refer to the potential benefits an individual misses out on when choosing one alternative over another, while sunk costs are expenses that have already been incurred and cannot be recovered. Therefore, in this context, an electric bill that varies with consumption is categorized as a variable cost, aligning it with the nature of costs that respond directly to production volumes or operational levels.