AQA A-Level Accounting: Budgeting (7127) – Revision Notes

These notes condense section 3.9, Budgeting, of the AQA A-level Accounting (7127) specification, version 1.1 (October 2026), for A-level exams from June 2019 onwards. The qualification is untiered, and section 3.9 is examined on Paper 2. For full explanations and longer worked examples, use the study guide; then test yourself with the practice questions.

Course links: AQA A-level Accounting hub, printable checklist and the free diagnostics. For the difference between financial and management accounting, see the role of the accountant revision notes. All figures below are invented.

Key definitions

Term	Meaning
Budget	A plan for a future period, in money and/or quantities
Budgetary control	Comparing actual results with budget, investigating variances and taking action
Budget holder	The manager responsible for a budget
Principal budget factor	The factor that limits activity (often sales demand); its budget is prepared first
Master budget	The budgeted income statement and statement of financial position (often with the cash budget), built from all the other budgets
Variance	Actual figure minus budgeted figure
Favourable (F)	The difference increases profit: more revenue or less cost than budget
Adverse (A)	The difference reduces profit: less revenue or more cost than budget
Flexed budget	The budget recalculated at actual output: variable items change, fixed costs do not
Incremental budgeting	Last period’s figures adjusted for expected changes
Zero-based budgeting (ZBB)	Every activity justified from zero each period

Purpose of budgeting (3.9)

Planning, co-ordination, communication, control, motivation, clear responsibility and performance evaluation. Learn one sentence of explanation for each, not just the word.

Order of preparation

1. Sales budget (units and £)
2. Production budget (units)
3. Materials usage and purchases budget (quantities and £)
4. Labour budget (hours and £)
5. Cash budget
6. Budgeted income statement
7. Budgeted statement of financial position

Formulas

Budget	Formula
Sales	Units × selling price
Production (units)	Sales + closing finished goods − opening finished goods
Materials usage	Production × quantity per unit
Materials purchases (quantity)	Usage + closing raw materials − opening raw materials
Materials purchases (£)	Purchase quantity × price per unit of material
Labour hours	Production × hours per unit
Labour cost	Hours × rate (overtime hours × premium rate where hours exceed capacity)
Closing bank balance	Opening balance + receipts − payments
Flexed variable cost	Actual output × budgeted cost per unit
Volume effect on profit	Flexed budget profit − fixed budget profit

Method in steps: cash budget

1. Build a receipts schedule: cash sales in the month of sale; credit sales in the month(s) received, net of any discount allowed and excluding expected irrecoverable debts.
2. Build a payments schedule on the same timing logic for purchases and expenses.
3. Add capital items: loans, capital introduced, asset purchases, drawings, dividends.
4. Leave out non-cash items: depreciation, irrecoverable debts, provisions, accruals.
5. Opening balance + receipts − payments = closing balance; carry it forward.
6. Show overdrafts in brackets.

Worked reminder: a business makes 20% of sales for cash. Credit customers pay half in the month after sale and half two months after. April sales £28 000, March £25 000, February £22 000. April receipts = 20% × 28 000 + 80% × 25 000 × 50% + 80% × 22 000 × 50% = 5 600 + 10 000 + 8 800 = £24 400.

Method in steps: budgeted statements

1. Revenue and expenses on the accruals basis for the period, not cash amounts.
2. Cost of sales = opening inventory + purchases − closing inventory.
3. Add depreciation (time-apportioned for a part year) and adjust for accruals and prepayments.
4. Closing trade receivables = opening + credit sales − receipts; trade payables likewise.
5. Bank balance comes from the cash budget.
6. Check: closing capital = opening capital + profit − drawings = net assets.

Method in steps: variances

1. Flex the budget to actual output (revenue and variable costs only).
2. Variance for each line = actual − flexed.
3. Label each F or A by its effect on profit, never by its sign alone.
4. Volume variance = flexed profit − fixed budget profit.
5. Reconcile: budgeted profit ± volume variance ± flexed variances = actual profit.
6. Interpret: give a likely cause, say whether it is controllable, and note links between variances (a cheaper material may cause more wastage; a price cut may raise volume).

Must-know distinctions

	Cash budget	Budgeted income statement
Basis	Cash received and paid	Accruals
Depreciation	Excluded	Included
Loan received, asset bought, drawings	Included	Excluded (loan interest is included)
Result	Bank balance	Profit or loss

	Incremental	Zero-based
Start point	Last period’s figures	Zero
Cost and time	Low	High
Waste	Carried forward	Challenged
Best for	Stable, routine costs	Discretionary costs; periodic reviews

	Fixed budget comparison	Flexed budget comparison
Output basis	Planned output	Actual output
Strength	Simple	Separates the volume effect from price and efficiency
Weakness	Mixes volume with efficiency	Needs costs split into fixed and variable

Benefits and limitations in brief

• Benefits: forward planning; co-ordinated departments; early warning of cash shortages; targets for motivation; a benchmark for control.
• Limitations: forecasts may be wrong; time and cost; rigidity; budgetary slack; “spend it or lose it”; demotivation if imposed; departmental goals placed above the business’s goals.
• Specific budgets: each one’s benefit is the planning it allows; each one’s limitation is the uncertainty in its own assumption. Errors in the sales budget flow into every other budget.

Budget	Main benefit	Main limitation
Sales	Sets the activity level for the whole business	Demand forecasts are the least certain figure
Production	Plans capacity and finished goods inventory	Volatile demand makes it go out of date quickly
Purchases	Avoids stock-outs and excess raw materials	Supplier prices and lead times may change
Labour	Shows overtime or recruitment needs in time	Absence and productivity changes are hard to predict
Cash	Warns of shortages so finance can be arranged	Customers may not pay when assumed
Budgeted income statement and statement of financial position	Test whether the plans give acceptable profit and liquidity	Only as reliable as every budget beneath them

Answering “evaluate” questions

The specification’s skills annex asks you to “prepare, analyse and evaluate budgets”, so be ready to judge budgeting as well as calculate it. A strong answer:

1. Uses the business in the question (its size, its managers, its figures), not generic points.
2. Gives benefits and limitations, each explained with a consequence (“so managers can…”, “which means…”).
3. Weighs them: which matters more for this business, and why?
4. Ends with a clear judgement, ideally with a condition (“ZBB is worth it for the marketing budget but not for rent and insurance”).

Worked reminder: a small firm with one owner-manager and stable costs gains little from ZBB, because the owner already knows every cost and the review time is better spent selling. A large firm with many departments and rising discretionary spending gains more, because waste is harder to see.

Small worked reminder: flexing

Budget: 1 000 units, variable cost £5 per unit, fixed cost £3 000. Actual: 1 200 units, total cost £9 400. Fixed budget cost £8 000, so the raw comparison shows £1 400 adverse. Flexed cost is 1 200 × 5 + 3 000 = £9 000, so the true cost variance is only £400 adverse. The other £1 000 is simply the cost of making 200 more units.

Quick self-test

1. Sales 800 units; opening finished goods 120 units; closing 150 units. Production?
2. Production 1 000 units at 3 kg each; opening raw materials 400 kg; closing 550 kg. Purchases in kg?
3. March credit sales £10 000; 70% pay in April and take a 2% discount. April receipt from March sales?
4. Which belongs in a cash budget: depreciation, drawings or a provision for doubtful debts?
5. Budgeted materials £4 per unit. Actual output 5 400 units; actual materials £22 140. Variance against the flexed budget?
6. Budgeted revenue £48 000; actual £50 000. Variance?
7. Define zero-based budgeting.
8. What is the principal budget factor, and why does it matter?
9. Labour budget: 600 units at 0.75 hours each, £16 per hour. Cost?
10. Opening overdraft £2 000; receipts £15 000; payments £14 200. Closing balance?

Answers

1. 800 + 150 − 120 = 830 units.
2. 3 000 + 550 − 400 = 3 150 kg.
3. 10 000 × 70% × 98% = £6 860.
4. Drawings (a cash outflow). The other two involve no cash.
5. Flexed 5 400 × 4 = £21 600; 22 140 − 21 600 = £540 adverse.
6. £2 000 favourable.
7. Each budget starts from zero, and every activity and its cost must be justified afresh.
8. The factor that limits activity (often sales demand); its budget is set first because it determines every other budget.
9. 600 × 0.75 × 16 = £7 200.
10. −2 000 + 15 000 − 14 200 = £1 200 overdrawn.

Where marks are usually lost

• Including depreciation, irrecoverable debts or provisions in a cash budget.
• Leaving out loans received, asset purchases or drawings from a cash budget.
• Receiving credit sales in the month of sale, or ignoring discount allowed.
• Using this month’s sales instead of next month’s to set closing inventory.
• Forgetting that opening inventory is last month’s closing inventory.
• Costing purchases on usage instead of purchase quantity.
• Calling a cost under budget “adverse”, or giving a variance with no F or A.
• Comparing with the fixed budget when actual output differs.
• Listing benefits of ZBB without evaluating them against its cost and time.
• Ending an evaluation without a judgement.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, A-level exams June 2019 onwards (AQA), section 3.9 Budgeting.