What does variance analysis help an organization assess?

Variance analysis is a critical tool that organizations use to evaluate their financial performance by assessing the differences between actual performance and budgeted expectations. This process involves comparing the budgeted amounts for revenues and expenses to what was actually realized during a specific period. By identifying variances—whether positive or negative—management can identify areas where the organization is underperforming or outperforming its expectations.

Understanding variance analysis allows organizations to make informed decisions based on performance metrics. For instance, if actual expenses exceed budgeted amounts, it can prompt a review of spending practices, whereas higher-than-expected revenues might encourage investment in growth initiatives. As such, variance analysis is integral to financial planning and performance management, enabling organizations to adjust their strategies and operations accordingly.

The other options, while related to organizational financial performance, do not capture the full scope of variance analysis. Fluctuations in employee salaries, revenue generated from different departments, and expenses incurred for specific projects deal with specific aspects of financial data rather than the broader comparison of actual to expected performance.