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Expanded Explanation: Variance analysis is used in budgeting to measure the difference between actual and planned behavior. It helps businesses understand why financial performance deviated from expectations, allowing for better future planning.

Potential Issues: Ignoring variances can lead to continued inefficiencies, cost overruns, and missed opportunities for cost savings or revenue enhancement.

Example: If your budget for utility expenses was $500 but you actually spent $450, you have a favorable variance of $50.

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