Profitability of a business enterprise depends basically on two factors: costs and sales. The efforts of the management should be to minimize the cost without compromising on the quality and pushing up the sales of the products. This requires proper monitoring of both costs & sales performances. Targets have to be fixed and the actual results should be compared with the pre-determined targets and variance found out.

Variance refers to the difference between the standard (or budgeted performance) and actual performance. Variance analysis is mainly concerned with ascertaining the quantum of variances together with the analysis of the causes responsible for such variances.