Definition

Variance analysis is the process of identifying and examining the difference between expected business performance versus actual numbers. With a variance analysis companies can effectively analyze favorable or unfavorable business results.

Example

Suppose a company budgeted for sales of $10,000 but the actual sales were only $8,000. As per variance analysis, the difference will be $2,000, which means, $2,000 less than the budget of $10,000. Variance analysis could help attribute this difference to a specific reason, such as the loss of XYZ customers in the preceding month resulting in a drop in sales. Further, the customer dropped out because of issues like non-satisfactory deliveries.

Why it matters

Variance analysis involves investigating differences such that the business can gather a summary of differences from performance expectations. It further allows businesses to interpret the reason for variance so that it can be worked upon to achieve better future results. Variance analysis can be especially effective if observed as a trend line. Any sudden movements in the trend over a period can be identified and fixed.

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