Variable costs in a [[cost structure]] are expenses that fluctuate in direct proportion to the level of production or sales volume. These costs include items such as raw materials, direct labor, and shipping expenses, which increase as more units are produced or sold and decrease when production or sales decline. Variable costs are crucial for businesses to monitor because they directly impact the gross margin and profitability; managing these costs effectively can lead to better financial performance. In contrast, [[fixed costs]] remain constant regardless of production levels, such as rent, salaries of permanent staff, and insurance. While variable costs change with output levels, fixed costs must be covered regardless of how much is produced or sold, making them a critical component in determining the breakeven point for a business.