What is variance analysis?

Variance analysis refers to the process of analyzing the differences between budgeted figures and actual financial performance. This method is vital for businesses as it helps management understand the reasons behind discrepancies, whether they arise from increased costs, lower revenues, or other operational factors. By assessing variances, managers can identify areas where the organization is overperforming or underperforming, facilitating informed decision-making and improved financial control.

The insights gained from variance analysis can lead organizations to revise budgets, adjust forecasts, implement corrective actions, or enhance strategic planning. It plays a critical role in performance management as it not only focuses on past performance but also guides future planning and financial accountability.