Variance analysis in accounting resembles a financial check-up that compares what you expected to happen with what actually did. For example, if you set a budget for your expenses or forecasted your income, variance analysis will help you see where things went differently than planned. In more detail, if you budgeted $500 for utilities but ended up spending $600, there's a $100 variance. By looking into this difference, you can figure out why it happened—maybe energy prices went up or you used more electricity than usual.
In a business setting, this process is even more important. It allows companies to monitor their financial health by comparing actual costs and revenues to what was budgeted. If there are significant differences, managers can investigate the causes and make informed decisions to keep the business on track.Â
Variance analysis matters because it’s like a reality check on your expectations. You start with a plan, and variance analysis lets you see if you’re hitting the mark or drifting off course. When there’s a gap between what you planned and what actually happened, that difference—or "variance"—gives you valuable insight.
For a business, knowing why actual expenses or revenues differ from projections helps leaders make better, faster decisions. If a certain cost keeps coming out higher than expected, it could mean there's an issue to fix, like an increase in supplier prices or unexpected demand. Or, if revenues are better than expected, you might want to capitalize on what’s working well.
Variance analysis isn't just about finding out what went wrong; it's about understanding trends, spotting opportunities, and making adjustments to stay on track.Â
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