Final answer:
A variance is the difference between actual costs and expected costs, which provides insights into a firm's financial performance. It helps in budgeting and identifies where actual spending deviates from planned spending.
Step-by-step explanation:
A variance is the difference between actual costs and expected costs. Variance helps businesses in assessing their financial performance by comparing what was actually spent to what was anticipated to be spent. In the context of accounting and budgeting, 'expected costs' represent the budgeted or standard costs that a company plans to incur. Variables such as fixed cost, marginal cost, average total cost, and average variable cost are crucial in understanding a firm's cost structure, which helps in identifying variances when actual figures deviate from the expected numbers. Notably, variance within samples is the average of the sample variances, also referred to as pooled variance, and illustrates the unexplained variation within the data.
In a short-run perspective, understanding the nature of fixed costs, which include sunk costs, and variable costs, which are associated with production and exhibit diminishing marginal returns, is essential for a firm's economic decision making, especially when dealing with production or pricing strategies.