What is the purpose of variance analysis?

Variance analysis serves the purpose of comparing actual performance with budgeted performance. This method is essential for organizations as it helps management understand the differences, or variances, between what was planned in the budget and what was actually achieved. By identifying these variances, managers can investigate the reasons behind them, whether they are due to changes in costs, sales volumes, or other operational factors. This insight is critical for making informed decisions about future budgets, adjusting operational strategies, and improving overall efficiency.

Through variance analysis, organizations can pinpoint areas of financial performance that are performing better or worse than anticipated, leading to corrective actions if necessary. This proactive approach allows for agile adjustments in operations and resource allocation, ultimately supporting the organization’s financial health and operational effectiveness.