What does variance analysis involve?

Variance analysis is a critical process in accounting that involves comparing actual performance to budgeted performance. This comparison is essential for identifying deviations, known as variances, between what was planned (budgets) and what was actually achieved. By conducting variance analysis, businesses can determine whether they are overspending or underspending in different areas, allowing for informed decision-making and adjustments in future budgeting.

The primary focus of variance analysis is to assess financial outcomes, enabling management to pinpoint specific areas where performance did not align with expectations. This process often includes analyzing both favorable and unfavorable variances to understand underlying causes, which can include fluctuations in costs, volume of sales, and other operational factors. Through this detailed examination, organizations can improve efficiency, control costs, and enhance overall performance.

The other choices, while important for different aspects of business management, do not directly pertain to the core purpose of variance analysis. Employee productivity, market trends, and marketing strategies are all valuable areas of analysis but are distinct from the specific function of assessing the financial variances of a business's performance compared to its budgeted goals.