Variable costs are expenses incurred in the business that change depending on the level of production. As an example, if I produce one picture frame, the variable costs will include my labour and the materials needed to make the picture frame. Fixed costs will include those costs that do not vary with the level of output, including rental of the premises where I make my picture frame. If I make two picture frames, the cost of labour and materials will increase proportionally, but the fixed costs will not change.