Variance Analysis

Definition

Variance analysis is a tool used by accountants to compare actual results to budgeted or expected results. It is used to identify the reasons for any differences between the two sets of results.

Example

For example, a company may have budgeted for a certain amount of sales revenue for a given period. At the end of the period, the actual sales revenue may be higher or lower than the budgeted amount. Variance analysis can be used to identify the reasons for the difference. It may be that the company was able to increase its prices, or that it was able to sell more units than expected. Variance analysis can also be used to identify the reasons for any differences in costs. For example, if the actual costs are higher than the budgeted costs, variance analysis can be used to identify the reasons for the difference.

Why it Matters

Variance analysis is an important tool for accountants and financial managers. It helps them to identify the reasons for any differences between actual and expected results. This information can then be used to make decisions about how to improve performance. For example, if the actual costs are higher than the budgeted costs, the company may need to take steps to reduce costs. Variance analysis can also be used to identify opportunities for improvement. For example, if the actual software expenses are higher than the budgeted amount, the company may need to take steps to reduce its spend.

Variance analysis is also important for budgeting and forecasting. By understanding the reasons for any differences between actual and expected results, companies can make more accurate forecasts and budgets. This can help them to plan for the future and ensure that they are able to meet their financial goals.

Overall, variance analysis is an important tool for accountants and financial managers. It helps them to identify the reasons for any differences between actual and expected results, and to make decisions about how to improve performance. By understanding the reasons for any differences, companies can make more accurate forecasts and budgets, and plan for the future.