What is the purpose of budget variance analysis?

Budget variance analysis is a critical financial management tool used to assess the differences between actual financial performance and planned budget figures. The main objective is to highlight variances, which can either be favorable or unfavorable, and to understand the reasons behind those differences. By analyzing these variances, organizations can gain insights into operational performance, financial efficiency, and areas that may require adjustments.

Understanding the budget's effectiveness relies on determining how actual outcomes compare to what was planned, thus making it essential for continuous improvement and strategic decision-making. This analysis supports initiatives for corrective actions and planning revisions, ensuring that the organization aligns closely with its financial goals.

In contrast, other options do not capture the core purpose of budget variance analysis. Creating a new budget, for instance, is a separate process focused on forward planning rather than evaluating past performance. Increasing revenue forecasts and reducing costs are potential outcomes of understanding variances but are not intrinsic to the analysis itself, which fundamentally aims to clarify discrepancies between the budget and actual results.