Step costs are best defined as:

Step costs are characterized by being fixed within certain ranges of activity but then changing to a different level once a threshold is crossed. This means that during a specific production volume, the costs remain constant, but as production increases and surpasses certain limits, additional resources may be required, resulting in a jump in costs. For example, a factory may operate with a certain number of workers for a production level of up to 1,000 units, but if production increases to 1,001 units or more, additional staffing or equipment may be necessary, thus increasing costs significantly.

Understanding step costs is vital for businesses in budgeting and planning because they can create significant variations in total costs that do not directly correlate with the volume produced. This distinguishes them from other types of costs that either increase linearly or remain constant regardless of production levels.