What is a variance analysis?

Variance analysis is the process of comparing budgeted figures to actual figures in order to identify and assess deviations. This process is critical in financial management and budgeting because it allows organizations to understand where they are performing as expected, where they are exceeding their expectations, and where they may be falling short. By analyzing variances, businesses can make informed decisions to address discrepancies, improve future budgetary planning, and enhance overall financial performance.

The methodologies involved in variance analysis include identifying the causes of the variances, whether they be from changed external market conditions, internal operational efficiencies or inefficiencies, or variations in input costs. This level of insight helps management to adjust strategies, control costs, and optimize resource allocation.

In contrast, the other options focus on different aspects of business processes. Evaluating employee contributions relates to performance management rather than financial assessment. Predicting future sales based on trends is more aligned with forecasting techniques. Measuring customer satisfaction pertains to marketing and customer relations rather than direct financial analysis. Thus, variance analysis distinctly serves the function of bridging the gap between expectations and actual financial outcomes, making it an essential tool for effective financial management.