Which option best describes what a variance analysis does?

Variance analysis primarily focuses on assessing the differences between what was forecasted (or budgeted) and the actual results achieved. This approach enables organizations to identify and understand the reasons for discrepancies, whether they stem from increased expenditures, lower revenues, or any other factors that may impact financial performance.

By conducting a variance analysis, management can analyze specific areas where performance did not align with expectations, which aids in making informed decisions about operational adjustments, resource allocation, and future budgeting. This analysis supports strategies for improving performance by highlighting trends and variances that merit attention.

The other options, while related to financial management and reporting, do not encapsulate the core purpose of variance analysis. Tracking departmental performance, creating spending formulas for future budgets, and categorizing expenses address different aspects of financial management but do not specifically refer to the crucial assessment of variances between planned and actual financial outcomes, which is the essence of variance analysis.