Final answer:
Depreciation is a variable expense only when the method used adjusts with production levels, which is the case with the units-of-production method. Other methods such as straight-line, sum-of-the-years'-digits, and declining-balance are based on time and are therefore considered fixed expenses.
Step-by-step explanation:
For income statement purposes, depreciation is considered a variable expense if the depreciation method used is related to the level of production and adjusts based on how much is produced. Out of the options provided, the units-of-production method is the one where depreciation expense varies with production levels. This method allocates a fixed cost per unit of production, meaning that the more you produce, the higher your depreciation expense will be, reflecting the greater wear and tear on the asset.
On the other hand, methods such as straight-line, sum-of-the-years'-digits, and declining-balance do not directly correspond with the level of production, meaning they represent fixed expenses. These methods are based on time rather than output and remain constant in regards to the depreciation charge each period, irrespective of the amount produced.
Costs can be divided into fixed costs and variable costs. Fixed costs, such as rent on a factory or retail space, do not change with production levels, while variable costs, like labor and raw materials, do change as production levels adjust.