Short definition: Variance analysis is a quantitative method used to compare actual results with planned or expected results, identifying and explaining the reasons for any differences (variances).
Explanation: It is a powerful tool for monitoring performance, identifying areas for improvement, and making informed decisions. Variance analysis can be applied to various aspects of a business, such as financial performance, production costs, or sales figures.
Example: A company budgeted to produce 10,000 units at a cost of $5 per unit. However, the actual production was 9,500 units at a cost of $5.20 per unit. Variance analysis would be used to identify the reasons for the lower production volume and the higher cost per unit.
Additional information (optional): There are different types of variances, including price variances, quantity variances, and mix variances. Variance analysis can be used to identify both favorable and unfavorable variances, helping management to understand the root causes of performance deviations and take corrective actions.