What is the purpose of variance analysis?

The purpose of variance analysis is fundamentally rooted in the comparison of planned spending with actual spending. This analytical tool helps businesses evaluate their financial performance by identifying discrepancies between budgeted figures and the actual results achieved. By doing so, organizations can pinpoint areas where performance deviated from the expectations, whether due to over-expenditure or under-performance in generating revenue.

Understanding these variances allows management to make informed decisions, such as adjusting budgets, reallocating resources, and devising strategies to improve future performance. This comparative approach not only aids in financial oversight but also fosters a greater understanding of the factors contributing to financial results, thereby enhancing overall strategic planning and operational efficiency.

Other options may address important business aspects but do not capture the primary essence of variance analysis, which centers specifically on the financial comparison between planned and actual expenditures.