What is variance analysis in budgeting?

Variance analysis in budgeting primarily involves comparing the planned or budgeted figures against the actual results to uncover any discrepancies. This process plays a crucial role in financial management, as it helps organizations understand the reasons behind variances, whether positive or negative. For instance, if actual expenses exceed the budgeted amounts, variance analysis can reveal specific areas where costs have risen unexpectedly, prompting discussions on how to address these issues. Conversely, favorable variances might indicate efficiencies or better-than-expected revenue, allowing management to capitalize on successful areas.

Understanding these variances is essential for better budget planning in the future and for making informed financial decisions, driving accountability within departments, and enhancing overall organizational performance.