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Variance Analysis

A variance is the difference between an actual result and an expected result. The process by which the total difference between standard and actual results is analysed is known as variance analysis. When actual results are better than the expected results, we have a favourable variance. If, on the other hand, actual results are worse than expected results, we have an adverse.

Importance of Variance Analysis

  • Variance analysis is used as a controlling tool. Managers can take suitable remedial actions to achieve the desired objectives if there is a variation of the actual performance.
  • It acts like a barometer for measuring business efficiency.
  • Through regular variance analysis, ‘weak spots’ can be ascertained and remedial actions can be taken.
  • Variance analysis aids framing of more accurate budgets in the future.
  • Variance analysis can be used for comparing the departmental performance of the organisation.
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