What is a variance analysis?

Variance analysis is the process of comparing actual financial performance to budgeted figures. This analytical method allows organizations to understand the differences—known as variances—between planned financial outcomes and what was actually achieved. By assessing where performance fell short or exceeded expectations, management can identify areas that need attention, whether it pertains to revenues, expenses, or overall operational efficiency.

This analysis is critical in budgeting because it helps organizations assess their fiscal health and operational effectiveness. When discrepancies are found, deeper investigation can be conducted to determine the underlying causes, enabling managers to take corrective actions for future planning and performance improvement.

The other options, while related to financial analysis and decision-making, do not specifically capture the essence of variance analysis like the chosen answer does. Evaluating operational efficiency focuses more on how well resources are being utilized rather than directly on financial performance versus budgets. Forecasting future revenues involves predicting income without a focus on past performance, and assessing market trends pertains to broader economic factors rather than internal performance metrics. Thus, option B correctly captures the specific nature of variance analysis within financial accounting.