Variable expenses are costs that change directly and proportionally with changes in production or sales volume. They include advertising, cost of goods sold, hourly wages, sales commissions and shipping costs.
As production and sales volume increase or decrease, variable expenses increase or decrease. Cost of goods sold is typically the largest variable expense. Variable expenses contrast with fixed expenses, which remain constant regardless of production or sales volume. If production were to cease, fixed costs would remain, while variable expenses would decrease to zero. Managers target variable expenses when trying to lower costs, but because they relate directly to volume, variable expenses are difficult to cut.