What does variance analysis involve?

Variance analysis primarily involves evaluating the differences between budgeted performance and actual financial performance. This process helps organizations understand why certain variances occurred, providing insight into the effectiveness of their financial planning and operational efficiency. By investigating these differences, a company can identify areas for improvement and ensure better alignment between forecasts and results.

Through variance analysis, companies can pinpoint favorable variances, where actual performance exceeds expectations, and unfavorable variances, where performance falls short. Such insights are crucial for making informed managerial decisions and optimizing future budgets.

The other options focus on different aspects of financial analysis or performance measurement, but they do not encapsulate the specific purpose or methodology of variance analysis as effectively as analyzing discrepancies between budgeted and actual figures does.