What is a variance?

A variance is fundamentally understood as the difference between planned and actual performance. It serves as a crucial measurement in various fields, particularly in finance and project management, where stakeholders assess how well objectives are being met.

When organizations set budgets or performance targets, they establish a plan that outlines expected outcomes. After a period of operation, comparing what was planned against what was actually achieved helps identify discrepancies. These discrepancies can be either favorable or unfavorable: a favorable variance implies better-than-expected performance, while an unfavorable variance signals a shortfall or over-expenditure relative to the planned metrics.

In essence, understanding variances allows businesses to make informed decisions, adjust strategies, and implement corrective actions to align future performance with set objectives. This process of measuring and analyzing variances is critical for maintaining accountability and enhancing overall organizational efficiency.

The other options do not encapsulate the definition accurately: a fixed amount that cannot change does not relate to the concept of variance, predicting future costs pertains more to forecasting rather than measuring past performance, and estimating potential savings falls outside the scope of understanding discrepancies in performance relative to targets.