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Managers create budgets from anticipated financial conditions and market expectations for future periods. They calculate revenues and expenses for the specific period being budgeted. Once that period has come, managers compare the actual expenses to the budget numbers and evaluate the departments performance (Adams, 2017). This is usually done through a variance analysis, which uses the difference between actual performance and budgeted performance to evaluate the performance of individuals and business units (Lanen, 2018, P. 621). It helps to identify and determine the possible causes of the difference (Lanen, 2018, P. 621). It also helps maintain control over a units expenses by monitoring planned versus actual costs (Adams, 2017). A few common variances used in variance analysis are profit, purchase price, labor rate, variable overhead spending, fixed overhead spending, and selling price. Effective variance analysis allows management to understand why fluctuations occur in its business, and what it can do to change the situation. A variance analysis should be performed on variances that are of most concern for the company, especially if it can be rectified. For example, a companys budget for sales was $12,000, but the actual sales were $9,000, the variance analysis would yield a difference of $3,000. A complete analysis could reveal that the variance was caused by a lost account. The customer purchased $2,600 per month from the company. The account was lost, due to the companys inconsistent delivers.

The downside of using variance analysis is that managers usually only receive them once a month, so they rely on other measurements (Adams, 2017). The reasons for the variances are not always located in the accounting records, managers must sort through information to determine the causes of the difference. Lastly, the variance may not produce any useful information.