What does variance analysis primarily study?

Variance analysis primarily focuses on comparing budgeted versus actual performance. This analytical process is used to identify deviations from the expected financial outcomes in order to evaluate efficiency and performance within an organization. By examining variances—whether they are favorable or unfavorable—management can gain insights into operational effectiveness, assess the accuracy of budget forecasts, and make informed decisions for future planning.

When businesses prepare budgets, they set expected financial targets based on various assumptions and forecasts. Variance analysis allows organizations to quantify the differences between these target figures and the actual results, providing essential feedback on where adjustments may be needed. This process facilitates greater accountability and helps identify areas for improvement, resource allocation, and strategic adjustments.

The other options focus on specific aspects of financial analysis but do not encapsulate the broader purpose of variance analysis. For example, while analyzing variable costs is important, it is just one part of a larger analysis process. Investments in fixed assets and determining market demand also pertain to financial decision-making but are distinct from the core intent of variance analysis. Ultimately, variance analysis serves as a critical tool for organizations to assess their performance in relation to financial expectations.