Variable costs vary depending on a company's production volume.Variable costs go up when a company produces more goods or services, and go down when it produces fewer goods or services. This is compared to fixed costs, which do not change in proportion to production volume. For example, B.A. Donuts Inc. produces donuts and pastries on a daily basis using raw materials like sugar, flour, milk and eggs. It also needs to pay for the production facility, insurance for the storage unit, security surveillance and equipment.  The variable costs B.A. Donuts needs to pay are sugar, flour, milk, eggs and any other material they must use up to produce donuts. The more they produce donuts, the more they will have to pay for raw materials, but the less they make donuts, the less they'll have to pay for raw materials.  The cost of the production facility, insurance, security surveillance and equipment are all considered fixed costs because regardless of production volume, those expenses need to be paid.  Variable costs are important because management needs to know its variable and fixed costs to see how profitable the company will be if they produce more or less.  Investors and analysts usually consider companies with a high ratio of variable costs to fixed costs to be a safer investment, as their profit margin is less volatile and profitability and risk is easier to take into account based on a production basis.