To elaborate a bit on googletorp's comment, this model is counter-intuitive to most people, but is based on the retail model, where inventory and product display are separate.
In a store, you might have a product that you have purchased, but for whatever reason, is not on display yet, on the showroom floor. Or, you have several products in several sizes, but all have separate skus.
You create a product on the backend for each SKU, and then display several (s,m,l,xl) as a variation, in the actual product page. So, you have a single product page, that will display four individual products.
I personally don't care for the model, or at least think the process should be linked to a product display node creation out of the box. I love Commerce, but think it has some ways to go in terms of usability/natural way of product creation for stores with <100 products.
For a visual, workflow-wise: Create--->Products -----> Product Node (Display) ----> Category/Taxonomy Term Association
Hopefully, this makes sense.