What is variance analysis used for?

Variance analysis is primarily used to compare actual performance to budgeted or standard costs. This process allows businesses to identify discrepancies or variances between what was expected (the budget or standards) and what actually occurred. By analyzing these variances, companies can better understand their financial performance, control costs, and make informed operational decisions to improve future budgeting and efficiency.

When actual results differ from budgeted targets, the analysis highlights areas that may require closer examination, such as operational inefficiencies or the need for adjustments in budgeting practices. This tool is essential for managerial accounting as it provides insights into performance driver metrics, helping managers to effectively allocate resources and implement corrective actions when necessary.

The other options do not align with the specific purpose of variance analysis; comparing historical financial statements focuses on retrospective analysis rather than performance deviations, analyzing market trends deals with external factors affecting the business rather than internal budget adherence, and assessing tax compliance relates to regulatory adherence rather than performance metrics against budgets or standards.