What is the purpose of variance analysis?

Variance analysis is a crucial tool in financial management and accounting that focuses on comparing budgeted figures to actual results. This process helps organizations understand the differences (or variances) between what was expected and what was achieved. By identifying these variances, management can analyze the reasons behind them, whether they are favorable or unfavorable, and take appropriate actions to improve financial performance.

This analysis allows for better planning and control, as it highlights areas where the business may be underperforming or where costs may be exceeding budgeted expectations. Such insights enable informed decision-making and can influence future budget planning.

While calculating total revenue, assessing employee performance, and predicting future sales trends can be important aspects of financial management, they are not the primary focus of variance analysis. The key aspect lies in the comparative study of budgeted versus actual figures to provide a clear picture of financial performance and operational efficiency.