Which of the following is considered a variable cost in farm budgeting?

Which of the following is considered a variable cost in farm budgeting?

• A. Machinery fuel, lube and repairs
• B. Insurance on buildings
• C. Property taxes on land
• D. Depreciation of equipment

Answer: (A)

Variable costs change with how much you produce or operate. Machinery fuel, lube, and repairs vary directly with use—more hours, more fuel burned, more wear and potential repairs required. Insurance on buildings and property taxes are generally fixed in the short term, not tied to production levels. Depreciation is an accounting allocation of past investment and is treated as a fixed cost in budgeting, since it doesn’t fluctuate with current production. So, the cost that truly varies with activity is machinery fuel, lube and repairs.

Variable costs change with how much you produce or operate. Machinery fuel, lube, and repairs vary directly with use—more hours, more fuel burned, more wear and potential repairs required. Insurance on buildings and property taxes are generally fixed in the short term, not tied to production levels. Depreciation is an accounting allocation of past investment and is treated as a fixed cost in budgeting, since it doesn’t fluctuate with current production. So, the cost that truly varies with activity is machinery fuel, lube and repairs.