What is the purpose of variance analysis?

The purpose of variance analysis is to evaluate differences between expected and actual performance. This process involves comparing budgeted figures to the actual results in order to identify variances, which can be favorable or unfavorable. By analyzing these variances, businesses can determine the reasons behind deviations from the budget, which can lead to informed decision-making and improved performance in the future. Identifying the causes of variances allows management to take corrective actions if performance is deviating from the desired outcomes, thus enhancing overall financial control and operational efficiency.

While preparing financial statements, forecasting future revenues, and managing inventory levels are important functions within accounting and financial management, they do not directly pertain to the specific goal of variance analysis, which focuses on understanding performance discrepancies. Variance analysis serves as a tool to understand operational effectiveness rather than fulfilling these other roles.