Variable costs are a type of business expense that directly fluctuates with the level of production output or sales volume. Examples of variable costs include raw materials, manufacturing labor paid per unit produced, and sales commissions.

For instance, if a business produces bicycles, the cost of the materials (tires, chains, frames, etc.) that vary with the number of bikes produced are considered variable costs. Similarly, the wages paid to workers for each bicycle assembled are also variable costs.

Understanding variable costs is important for budgeting and forecasting because they impact the calculation of overall costs, profits, and the break-even point—the level of sales needed to cover all costs. Managers use knowledge of variable costs to make operational decisions, like determining production levels or pricing strategies, while aiming to maximize profit.