Variance analysis is the term which is used in the context of budgeting, it can be compared with a report card of students, If as a parent you had excepted your child to score between 70 to 80 percent marks but report card show 60 percent marks then that is variance and you as a parent would look into factors which resulted in lower marks.

In the same way a company makes certain budgets for costs and revenue and when the actual revenues and costs are different from planned costs and revenues then the analysis of that difference is called variance analysis. It can be better understood with the help of an example, suppose a company has a budget of $100000 for manufacturing a product and the sales target of a company is $150000 but the actual costs turned out to be $120000 and sales turn out to be $125000 than there is a variance of $20000 in cost and $25000. Variance analysis involve finding out the reasons for variance between the actual and budget and taking steps to make sure that next time there is no such variance.

Variance can be in many forms like it can be sales price variance, labor rate variance, material price variance and so on. The main reason behind variance analysis is to improve the productivity of the company by reducing the variance and thereby increasing the profitability of the company.