CPIM Practice Exam

What does the term "variance" refer to in a business context?

1. Profit margin analysis

2. Expected vs actual values

3. Inventory valuation discrepancies

4. Standard cost evaluations

The correct answer is: Expected vs actual values

The term "variance" in a business context primarily refers to the difference between expected (or budgeted) values and actual values. This concept is crucial for performance measurement and management, as it allows organizations to identify areas where financial performance deviates from plans or forecasts. By analyzing variances, businesses can gain insights into their operations, determine the causes of these discrepancies, and make informed decisions to improve efficiency and effectiveness. The other options, while related to financial analysis and management, do not capture the broad definition of variance. Profit margin analysis focuses on profitability relative to revenues, inventory valuation discrepancies pertain specifically to asset management and accounting, and standard cost evaluations deal with cost control and efficiency analysis. Variance analysis, however, encompasses these elements by comparing actual performance against expected metrics across many areas, making it a foundational tool in business performance assessment.