What is the purpose of creating env variables for a session bean.

How does one configure these variables on the application server

Your question is not clear! developers assume a lot.
So assuming that your question is on <env-entry>,
They are used to configure certain reference values for the session bean. They are set through ejb-jar.xml entry and can be read using a JNDI look up
consider example ejb-jar.xml fragment
<session>
  ...
  ...
  <env-entry>
     <!-- Access in code using JNDI lookup("java:/comp/env/get_assumption_sql") -->
     <env-entry-name>get_assumption_sql</env-entry-name>
     <env-entry-type>String</env-entry-type>
     <env-entry-value>
         SELECT ASSUMPTION FROM MIND
     </env-entry-value>
     <description>This env entry is for ... </description>
   </env-entry>
   ...

Now if your session bean want to get this SQL, you simply do a look up as:
   initCtx.lookUp("java:/comp/env/get_assumption_sql");

HTH