Variable costs are expenses that are directly proportional to the level of business activity such as production volume or sales — they increase or decrease as a direct result of increases or decreases in sales or production. (This should not be confused with fixed costs, which are independent of any change in business activity. Fixed costs, when combined with variable costs, yield the total costs for a business.)
For a manufacturing-based company, examples of variable costs include raw materials, packaging, and production incentive bonuses. In a retail company variable costs include sales commissions, inventory purchased for resale, and packaging. These types of expenses are called the cost of goods sold, and are always considered to be variable costs.