Which financial term refers to expenses that change with the level of activity?

The term that describes expenses which vary directly with the level of activity is known as variable expenses. These costs increase or decrease depending on the volume of goods or services produced or sold. For instance, if a business produces more units, its raw materials expense will increase because more materials are needed. Conversely, if production decreases, those costs will fall.

In contrast, fixed expenses remain consistent regardless of activity levels, such as rent or salaries. Operational expenses encompass both fixed and variable costs related to regular business operations, whereas capital expenses refer to significant purchases of physical assets or investments that are not directly tied to production levels. Thus, variable expenses are specifically defined by their fluctuating nature in response to changes in business activity, which makes this choice the correct one.