Sanding does help eliminate some of the bumps, but it is primarily aimed at mechanically bonding the layers of varnish together. Once dried, subsequent coats of varnish will not chemically bond to the dried layer. You can "hot coat" varnish if you are good (or like me, don't care that much and are impatient :-). That involves putting subsequent coats on before the first completely dries. The first layer is usually dry to a light touch, but tacky with pressure. Caution should be used doing so, though. If you get it wrong, the coats underneeth may have trouble drying (i.e. the solvents in them can not evaporate through the layers above them). That obviously leads to problems such as tacky spots and holidays. To be safe, do not do as I sometimes do :-) and wet sand or steel wool between coats.

Bill