What is the purpose of variance analysis?

Variance analysis serves a crucial role in financial management by comparing actual performance against budgeted performance. This process helps identify discrepancies—known as variances—and delves into their underlying causes. By analyzing these variances, organizations gain insights into areas where they are performing poorly or exceeding expectations, enabling them to make informed decisions.

When actual results deviate from what was anticipated, it often prompts further investigation to understand why these differences occurred. This could include examining operational efficiencies, changes in market conditions, or variations in resource utilization. Ultimately, variance analysis is a vital tool for performance management, allowing businesses to implement corrective measures and drive continuous improvement.

The other choices, while related to financial management, do not capture the essence of variance analysis as effectively as the correct answer does. Creating budgets is a separate process, focusing on future planning rather than retrospective comparison. Identifying efforts for improvement can be an outcome of the analysis but is not the primary purpose. Similarly, analyzing competitive trends may provide strategic insights but falls outside the direct scope of variance analysis.