Actually, the best place to set it up is right in the table itself, then it should carry right on through to your report.
As you create/edit the variable in your table, select "Yes/No" as your Data Type instead of "Text". Then, go to the "Lookup" tab of the field in the table and change Display Control to "Combo Box", change Row Source Type to "Value List", and then enter "Yes;No" (without the quotes) in Row Source. The field is now a Yes/No drop down box.
You may need to delete the field from your report and then add it back again to get these field changes to take place on your report.