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.
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.