In cost accounting for a manufacturing business, which of the following is the best example of a variable cost?

Introduction / Context:
Understanding the difference between fixed and variable costs is fundamental in management accounting and is often tested in interviews for finance, operations and business roles. Variable costs change in total as the level of activity or production volume changes, while fixed costs remain the same in total within a relevant range, regardless of output. This question asks you to recognise a typical variable cost item in a manufacturing environment, where materials, labour and overheads must be classified correctly for decision making and break even analysis.

Given Data / Assumptions:
- We are dealing with a manufacturing company that produces physical goods. - The options include raw materials, rent, property tax and insurance. - Variable cost means a cost that varies in total with the number of units produced. - Fixed cost means a cost that stays constant in total over a relevant output range.

Concept / Approach:
In a typical cost structure, direct raw materials are a classic example of a variable cost because the total cost of materials rises as more units are produced and falls as output declines. Each additional unit requires additional material. By contrast, factory rent, property tax and annual insurance premiums are generally fixed costs, because the total amount paid does not change directly with small to moderate changes in production volume. Identifying these patterns helps in computing contribution margins, setting prices and analysing cost behaviour under different scenarios.

Step-by-Step Solution:
Step 1: Evaluate option A, the cost of raw materials. If the firm produces more units, it must purchase more materials. If production falls, material usage decreases. The total cost varies in direct proportion to output, so this is a variable cost. Step 2: Evaluate option B, factory rent. Typically, rent is based on a lease agreement with a fixed monthly payment, independent of whether the factory runs at 40 percent or 90 percent capacity, as long as the firm occupies the space. Step 3: Evaluate option C, property tax. This is usually assessed annually based on property value, not on the number of units produced. Therefore, it is a fixed cost within the relevant range. Step 4: Evaluate option D, insurance premium. Insurance premiums are normally fixed for the coverage period and do not fluctuate daily with output levels, so they are fixed costs. Step 5: Conclude that only the cost of raw materials fits the definition of a variable cost.

Verification / Alternative check:
You can verify by asking what would happen to each cost if production were temporarily stopped for a month but the factory remained open. Raw material purchases would drop sharply because no units are being produced, reducing variable cost to nearly zero. However, rent, property tax and insurance would still need to be paid to keep the factory and equipment available. This thought experiment reinforces that raw materials behave as a variable cost, while the others remain fixed in the short term.

Why Other Options Are Wrong:
Factory rent (Option B) is a fixed commitment and does not change with output, so it is classified as a fixed manufacturing overhead. Property tax (Option C) depends on property value and tax rules, not on the production level, so it stays constant in total for the year. Insurance premium (Option D) is a fixed cost for the coverage period and is paid regardless of how much is produced.

Common Pitfalls:
A common error is to think that any large cost must be fixed or that all costs related to the factory are variable. In reality, classification depends on behaviour with respect to activity, not on size or location. Another pitfall is confusing unit cost with total cost. For example, the fixed cost per unit appears to change when output changes, but the total fixed cost remains the same. For exam and interview purposes, remember that direct raw materials and some categories of direct labour are typical variable costs, while rent, depreciation, property tax and most insurance expenses are fixed manufacturing overheads.

Final Answer:
The best example of a variable cost is The cost of raw materials used directly in producing each unit of output, because this cost increases or decreases in direct proportion to the level of production.