Extended-form Case Study

Accounting variance analysis

Published on August 29, 2019   21 min
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Hi. Welcome to "Accounting Variance Analysis," a case study. I'm Michael McDonald. I'm a Professor of Finance at a University in Connecticut in the United States. Today, I'd like to talk to you about a key tool in corporate finance. This is called variance analysis or sometimes accounting variance analysis. Now, variance analysis is something that you need to know whether you're planning to be a finance person, an accounting person, or any other person working in a business discipline. The reason this is so important, even for non-finance employees, is that variance analysis helps us to understand how the firm is performing and if it's living up to expectations and the promises that is made to shareholders, to employees, and other stakeholders in the firm. We'll explore how variance analysis works and look at some real-world examples of variance analysis in practice. Let's get started. Shall we?
So what is variance analysis? Variance analysis helps firms to understand where they are in relation to where they have been and where they plan to be in the future. Essentially, it's the difference between actual financial results and either our planned results or our past results. So we're looking at the variance or the difference between where we are and where we thought we would be based on our projections, our forecasts, and the plan made by top executives at the company. So hopefully, you're starting to see variance analysis is really all about understanding whether the firm is meeting and exceeding its goals or whether it's falling short of those goals. That's a key facet to understand for any business that's out there.