What is "variance analysis"?

Variance analysis is primarily defined as a comparison of budgeted figures to actual figures, which allows organizations to identify discrepancies and analyze the reasons behind these variances. This process provides insights into financial performance, highlighting whether an entity is staying on track with its budget or falling short in specific areas.

By closely examining the differences between the planned budget and the actual financial outcomes, management can gain a deeper understanding of various factors influencing performance, such as operational efficiency, market conditions, or changes in expenses and revenues. This analysis leads to improved decision-making and strategic planning, as it reveals trends and potential areas for corrective action.

Other options do not accurately capture the essence of variance analysis. Forecasting future budgets involves predicting future expenses and revenues, which is a different analytical process. Reducing fixed costs focuses on operational improvements rather than budget comparison. Lastly, creating a system for funding emergency expenses pertains to financial planning and risk management, distinct from the core function of variance analysis.