What is variance analysis in financial management?

Variance analysis in financial management refers to the process of comparing actual performance to budgeted performance. This analytical tool helps organizations identify discrepancies between what was expected and what occurred, enabling management to pinpoint areas that require corrective action or that demonstrate effective performance.

By systematically analyzing variances, managers can understand the reasons behind positive or negative financial results. For instance, if expenses are higher than budgeted, management can investigate the causes—whether they are due to increased costs, inefficiencies, or external market conditions. This insight allows organizations to make informed decisions to improve future performance.

The other options do not accurately describe variance analysis. Adjusting the income statement for errors is more about corrections and accounting accuracy rather than performance evaluation. Calculating future costs pertains to budgeting and forecasting, which, while related, is not the essence of variance analysis itself. Assessing investor returns focuses on investment performance rather than operational efficiency or financial planning within the organization. Thus, the essence of variance analysis is firmly rooted in performance comparison against established budgets.