Variable variables in PHP allow the name of a variable to be dynamically set and accessed using the value of another variable. They are useful for situations where variable names need to be dynamically generated, such as when uniquely identifying employees or students with IDs. Examples shown include outputting a name based on an ID variable, generating variables from an array, and simulating Excel's indirect() function to create dependent drop-down lists in a form. Variable variables can reduce code, provide a central sanitization point for external inputs, and make variable names easier to modify.