What does variance analysis aim to do?

Variance analysis primarily aims to compare actual performance to budgeted performance by identifying the differences, or variances, between the two. This process allows managers to understand where their expectations aligned with actual results, thereby providing insights into operational efficiency and financial performance. By analyzing these variances, organizations can pinpoint areas that require attention—such as overspending, revenue shortfalls, or operational inefficiencies—and make informed decisions to improve future performance.

This method of analysis is essential for effective budgeting and forecasting, as it gives management the ability to take corrective actions when performance deviates from the plan. When management identifies negative variances, they can investigate the underlying causes and implement changes aimed at achieving better alignment with budgeted goals in the future.

Other options may focus on specific aspects of business performance, such as assessing profitability, evaluating employee performance, or understanding market trends, but they do not capture the primary focus of variance analysis itself, which is fundamentally about comparing actual results to what was budgeted or planned.