Question

Describe the concept of variance analysis. Explain the importance of variance analysis. Provide specific examples of how variance analysis is beneficial to the organization.

Answer 1

Variance analysis helps in find the deviation of the results form the means. It is the sum of square of the deviation from the mean divided by (n-1). Variance =((x1-mean)^2+(x2-mean)^2+(x3-mean)^2.....(xn-mean)^2)/(n-1)
Importance of variance analysis
1. It is used by investors to identify risk of return of a security instrument. Variance provides the risk of return in any security.
2. It is used by companies to identify the variance of of their revenue and cost estimate and deviation of the results from forecast.


In business the most important thing is to maintain costs which are close to estimate. Variance analyis helps in identifying the particular costs which has led to deviation from forecast. There are many expenses like operating expenses, depreciation , interest expenses, raw material cost. Variance analysis of each of these costs can help to identify the source of highest deviation. Higher the variance , higher will be the deviation and such costs should be focused on.
Revenue estimates can also use variance analysis to improve revenues and profits