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Managers create budgets from anticipated financial conditionsand market expectations for future periods. They calculate revenuesand expenses for the specific period being budgeted. Once thatperiod has come, managers compare the actual expenses to the budgetnumbers and evaluate the department’s performance (Adams, 2017).This is usually done through a variance analysis, which uses thedifference between actual performance and budgeted performance toevaluate the performance of individuals and business units (Lanen,2018, P. 621). It helps to identify and determine the possiblecauses of the difference (Lanen, 2018, P. 621). It also helpsmaintain control over a unit’s expenses by monitoring plannedversus actual costs (Adams, 2017). A few common variances used invariance analysis are profit, purchase price, labor rate, variableoverhead spending, fixed overhead spending, and selling price.Effective variance analysis allows management to understand whyfluctuations occur in its business, and what it can do to changethe situation. A variance analysis should be performed on variancesthat are of most concern for the company, especially if it can berectified. For example, a company’s budget for sales was $12,000,but the actual sales were $9,000, the variance analysis would yielda difference of $3,000. A complete analysis could reveal that thevariance was caused by a lost account. The customer purchased$2,600 per month from the company. The account was lost, due to thecompany’s inconsistent delivers.

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