Variable costs are expenses incurred by a business that fluctuate according to its production levels or level of business activity. Unlike fixed costs, which remain constant regardless of output, variable costs vary directly with production or sales. Examples of variable costs include raw materials for product manufacturing, shipping costs for online retail sales, and sales commissions for sales personnel. For instance, if a factory increases its output, the cost of raw materials will likewise increase in proportion to the production level.

Understanding variable costs is crucial for businesses as it helps in pricing strategies, budgeting, and profit analysis. By identifying and tracking variable costs, businesses can determine the contribution margin and assess how changes in activity levels impact profitability. This information also aids in making critical decisions such as scaling production up or down, entering new markets, or discontinuing a product line.