What is a variance report?

A variance report is fundamentally a management tool used in accounting that allows organizations to compare actual financial or operational outcomes against budgeted figures. This comparison helps management ascertain where discrepancies exist—identifying variances that can be favorable or unfavorable.

Favorable variances indicate that actual performance was better than anticipated, while unfavorable variances show that performance fell short of expectations. By analyzing these variances, businesses can make informed decisions to adjust operations, correct inefficiencies, and improve overall financial performance. This report acts as a critical feedback mechanism that aids in performance assessment and strategic planning.

In contrast, other options do not relate to the concept of variance reporting. Calculating taxes owed is an entirely different function related to compliance and tax obligations, while reports on employee performance focus primarily on workforce productivity and efficiency rather than financial metrics. Similarly, financial forecasts are projections of future financial outcomes, not evaluations of past performance relative to budgeted targets. Thus, a variance report specifically focuses on the assessment of actual results against planned budgets, making it a valuable tool for management and decision-making.