VARIANCE ANALYSIS Meaning and
Definition
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Variance analysis is a financial management technique used to compare and analyze the difference between planned or expected performance and actual results. It involves examining the variance or deviation from the projected or budgeted figures to understand the reasons behind the differences and take corrective actions if necessary.
In the field of accounting and financial management, variance analysis is considered a valuable tool in evaluating and monitoring the overall performance of a business or project. It can be applied to various financial aspects such as sales, expenses, revenue, production costs, and profitability. By comparing the actual outcomes with the budgeted or standard figures, it enables managers to identify areas of improvement or potential problems.
Variance analysis employs various methods to assess and interpret the variances. These methods can include calculating the differences in absolute values, percentages, or ratios and also conducting detailed examination of different components of the budget to analyze the root causes of variances. The various types of variances that can be analyzed may include sales volume variances, price variances, cost variances, efficiency variances, and mix variances, among others.
The insights gained from variance analysis help organizations to understand the reasons behind the variances and make informed business decisions. It enables managers to identify potential inefficiencies, cost overruns, production delays, or revenue shortfalls. By identifying these outliers, managers can devise strategies to address the issues and take corrective actions to improve performance and overall financial health.
Common Misspellings for VARIANCE ANALYSIS
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Etymology of VARIANCE ANALYSIS
The term "variance analysis" comes from the combination of two words: "variance" and "analysis".
The word "variance" originally comes from the Latin word "varius", meaning "changing" or "diverse". It entered the English language in the 16th century and was initially used to describe the difference or discrepancy between things.
The word "analysis" has its roots in the Greek word "analyein", which means "to loosen" or "to break apart". It was later adopted into Latin and then English, where it refers to the process of breaking down or studying something in detail.
When combined, "variance analysis" refers to the process of examining and evaluating the differences or discrepancies between planned or expected values and actual values. It is often used in finance and accounting to compare budgeted or standard costs with the actual costs incurred, allowing for identification of reasons for the discrepancies and potential areas of improvement.
