In accounting terms, what does the term 'variance' typically indicate?

The term 'variance' in accounting primarily refers to the difference between budgeted and actual results. This concept is essential for financial analysis and performance evaluation, as it highlights discrepancies between what was planned (budget) and what was realized (actual performance). By analyzing variances, businesses can identify areas requiring attention, assess operational efficiency, and implement corrective measures when necessary.

For example, if a company budgets $100,000 for sales but realizes only $90,000, the variance is $10,000 unfavorable. This information is vital for management to understand, as it can provide insights into market conditions, operational issues, or effectiveness in sales strategies. Variance analysis is frequently performed on various components, including revenue, expenses, and profit margins, making it a key tool for effective financial management.