What is the main purpose of variance analysis?

Variance analysis is primarily aimed at analyzing the difference between budgeted and actual performance. This process is crucial for organizations as it allows them to identify and understand the reasons behind any discrepancies in financial performance. By examining variances, management can assess areas where the organization is performing well and where it may be underperforming compared to its budgeted expectations.

When a budget is established, it serves as a financial plan that outlines expected revenues and expenses. Variance analysis helps in determining whether the organization is adhering to this plan or if adjustments are necessary. Understanding the root causes of variances enables managers to make informed decisions, take corrective actions, or adjust future budgets based on past performance trends.

The other options, while related to financial analysis, do not capture the specific focus of variance analysis as effectively. Comparing budgets with historical performance is broader and does not focus solely on the differences. Ensuring compliance with tax regulations is related to legal financial obligations, while forecasting future revenues and expenses is about planning ahead rather than evaluating past performance. Therefore, the essence of variance analysis lies in the detailed examination of the differences between what was budgeted and what actually occurred.