A Level Accounting: Budgeting and budgetary control (Cambridge 9706) – Revision Notes

These notes condense section 4.3 Budgeting and budgetary control (A Level content) of the Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028. For full explanations and a complete master budget, read the study guide. Then test yourself with the practice questions. Other links: course hub, printable checklist, exam preparation guide and free diagnostics. Businesses and figures are invented; amounts are in dollars.

Key terms

Term	Meaning
Budget	A financial plan for a future period
Budgetary control	Comparing actual with budget, investigating differences, acting
Master budget	Summary of all budgets: budgeted statement of profit or loss, statement of financial position, cash budget
Limiting factor	The scarce resource or condition that caps activity
Fixed budget	Set for one activity level; not revised
Flexible budget	Restated for the actual activity level
Favourable / adverse	Actual profit higher / lower than the comparison budget

Budgetary control: for and against

Advantages	Disadvantages
Planning and co-ordination across departments	Time-consuming and costly
Targets communicated; performance benchmark	Forecasts may be wrong
Focus on large differences	Rigid if conditions change
Helps allocate scarce resources	Slack, padding, spend-it-or-lose-it
Can motivate	Unfair targets demotivate; money focus ignores quality

Spreadsheets: for and against

Advantages	Disadvantages
Instant recalculation across linked budgets	Hidden formula or input errors spread
Quick what-if testing	Weak audit trail, access and version control
Fewer arithmetic slips	Risk of loss or unauthorised change
Reusable templates; charts	Needs skilled users; layout can mask poor assumptions

Limiting factors

1. Identify the factor (demand, labour, material, machine hours, cash).
2. Budget that function first, then fit the others to it.
3. If the constraint can be relaxed (overtime, outsourcing, extra finance), say what it costs.

Example: sales demand is 5,000 units but machines can make 4,200. The sales budget is held to 4,200 unless capacity grows.

Formula table

Budget	Calculation
Production (units)	Sales + closing inventory - opening inventory
Purchases (quantity)	Used in production + closing materials - opening materials
Labour cost	Units produced x hours per unit x rate per hour
Receivables, closing	Opening + credit sales - cash received
Payables, closing	Opening + credit purchases - cash paid
Cash budget	Receipts - payments; add opening cash; exclude depreciation
Flexed variable cost	Budget cost per unit x actual units
Flexed fixed cost	Unchanged (within normal activity range)

Method for the cash budget

1. List receipts by month: cash sales, then receivables collected from the receivables budget.
2. List payments by month: suppliers from the payables budget, wages, overheads paid, capital items, other cash outflows.
3. Net cash flow, add opening cash, carry the closing figure forward.
4. Comment on any overdraft month and what to do about it.

Worked reminder 1: production, purchases and timing

Kelsale Candles sells 500 (January), 600 (February), 800 (March) and 700 (April) candles at 25 each. Closing inventory is 10% of next month’s sales. Each candle uses 0.4 kg of wax costing 5 per kg. Closing wax is 90 kg (January), 100 kg (February) and 120 kg (March). All sales are on credit: 60% is paid in the month after sale and 40% two months after.

	Feb	Mar
Sales	600	800
Closing inventory	80	70
Opening inventory	60	80
Production	620	790
Wax used (kg)	248	316
Closing wax	100	120
Opening wax	90	100
Wax purchased (kg)	258	336
Cost at 5 per kg	1,290	1,680

March cash from customers: 40% of January sales (500 x 25 = 12,500) plus 60% of February sales (600 x 25 = 15,000) = 5,000 + 9,000 = 14,000.

Worked reminder 2: flexible budget and reconciliations

Thurlow Bikes budgeted 800 bikes at 60 each: materials 18, labour 14 and variable overhead 6 per bike, plus fixed overhead 9,600. It made and sold 950 bikes. Actual: revenue 56,050, materials 16,150, labour 14,250, variable overhead 5,700, fixed overhead 9,900.

	Fixed budget 800	Flexed budget 950	Actual 950	F / (A)
Revenue	48,000	57,000	56,050	(950)
Materials	14,400	17,100	16,150	950
Labour	11,200	13,300	14,250	(950)
Variable overhead	4,800	5,700	5,700	0
Fixed overhead	9,600	9,600	9,900	(300)
Profit	8,000	11,300	10,050	(1,250)

Cost of production: flexed 45,700, less materials 950 favourable, plus labour 950 adverse, plus fixed overhead 300 adverse = actual 46,000.

Profit: flexed 11,300 - 950 (revenue) + 950 (materials) - 950 (labour) - 300 (fixed overhead) = actual 10,050.

Fixed budget profit 8,000 plus volume effect 3,300 (150 extra bikes x 22 contribution) gives the flexed profit of 11,300.

Method for the budgeted statements

1. Statement of profit or loss: revenue from the sales budget; cost of sales = opening finished goods + production cost - closing finished goods; deduct selling and fixed overheads; include depreciation here even though it is not in the cash budget.
2. Statement of financial position: non-current assets = opening + purchases - depreciation; inventory from the production and purchases budgets; receivables and payables from their budgets; cash from the cash budget; equity = opening equity + budgeted profit (less any drawings or dividends).
3. Check that total assets less liabilities equal equity. An imbalance points to an error in an earlier budget.

Why flexible budgets beat fixed budgets

• The comparison is like for like, because both sets of figures relate to the same output.
• Managers are held to account for price, efficiency and spending, not for sales volume they did not control.
• Targets look fairer, so they are more likely to be accepted.
• The size of the difference caused by volume alone can be shown separately (extra units x contribution per unit).

Layout of the two reconciliations

Cost of production	Profit
Flexible budgeted cost of production	Flexible budgeted profit
Add adverse / deduct favourable: materials, labour, variable production overhead, fixed production overhead	Add favourable / deduct adverse: revenue, materials, labour, overheads, selling and administration costs
Actual cost of production	Actual profit

Notice the direction. A favourable cost difference lowers the cost of production, but raises profit.

Causes of differences

• Price: supplier changes, discounts, pay awards, inflation, selling price cuts.
• Quantity or efficiency: waste, material quality, machine breakdown, staff skill and training, overtime.
• Overheads: unplanned repairs, rent or utility changes.
• Planning: an unrealistic budget in the first place.

Differences can be linked: cheaper material may lower the price paid but raise waste and labour time.

Behavioural aspects

Issue	Positive effect	Risk
Targets	Stretching but achievable targets give direction	Too easy: complacency. Too hard: demotivation
Participation	Ownership and commitment	Slack built into requests
Imposed budgets	Speed; alignment with objectives	Resentment, low acceptance
Incentives	Effort aimed at targets	Manipulation, short-termism, cutting quality
Controllability	Fair judgement	Blame for costs a manager cannot influence

Non-financial factors

Staff morale and turnover, customer satisfaction, quality, supplier relationships, environmental impact, reputation, ethics, long-term sustainability. In a recommendation, give a balance of reasons, then a justified decision.

Quick self-test

1. Define a master budget.
2. Sales are 450 units, opening inventory is 60 and closing inventory is 90. How many units are produced?
3. A firm uses 1,200 kg of material, with opening inventory of 150 kg and closing inventory of 200 kg. What is the purchases quantity, and the cost at 3.20 per kg?
4. Why is depreciation left out of a cash budget?
5. Sales were 10,000 (January) and 12,000 (February). Customers pay 70% one month after sale and 30% two months after. What is received in March?
6. Variable costs are 18,000 at 600 units. What is the flexed figure at 750 units?
7. Give two causes of an adverse materials difference.
8. State one limiting factor and one way to ease it.
9. Flexed profit is 14,200. Revenue is 800 favourable, materials 1,400 adverse, labour 700 adverse and other items nil. What is actual profit?
10. Opening receivables are 8,500, credit sales 41,000 and cash received 39,000. What is the closing balance?
11. Why compare actual results with a flexed rather than a fixed budget?
12. Give one advantage and one disadvantage of imposed budgets.

Answers

1. The summary of all the budgets, usually the budgeted statement of profit or loss, statement of financial position and cash budget.
2. 450 + 90 - 60 = 480 units.
3. 1,200 + 200 - 150 = 1,250 kg; 1,250 x 3.20 = 4,000.
4. It is a non-cash expense; no money leaves the business.
5. 30% x 10,000 + 70% x 12,000 = 3,000 + 8,400 = 11,400.
6. 18,000 / 600 = 30 per unit; 30 x 750 = 22,500.
7. For example a supplier price rise, or extra waste from poor quality or machine faults.
8. Skilled labour is scarce; train staff, use overtime or subcontract.
9. 14,200 + 800 - 1,400 - 700 = 12,900.
10. 8,500 + 41,000 - 39,000 = 10,500.
11. The flexed budget is at actual activity, so remaining differences come from price, efficiency and spending, not volume.
12. Advantage: quick and aligned with objectives. Disadvantage: managers may reject targets they did not help set.

Where marks are usually lost

• Production budget: using sales units alone, or reversing opening and closing inventory.
• Putting depreciation, or credit sales rather than cash received, in the cash budget.
• Using the wrong collection timing when customers pay over two months.
• Flexing fixed costs, or leaving variable costs at the fixed budget level.
• Adding and subtracting in the wrong direction in a reconciliation; label each line favourable or adverse.
• Reconciling the production cost but including selling costs.
• Listing advantages and disadvantages without applying them to the business in the question.
• Recommendations that ignore non-financial factors or give no justified conclusion.
• Statement of financial position that does not balance, usually from a missed cash or retained earnings figure.

Frequently asked questions

Which section of Cambridge 9706 covers budgeting? Section 4.3 Budgeting and budgetary control is A Level content in Cambridge International AS and A Level Accounting 9706. It covers budgetary control, spreadsheets, the master budget, flexible budgets, reconciliations and behavioural aspects.

What are the two budget reconciliation statements? One reconciles the flexible budgeted cost of production with the actual cost of production, and the other reconciles flexible budgeted profit with actual profit. Selling and administration costs belong only in the profit reconciliation.

How do you calculate the production budget? Production = sales + closing inventory − opening inventory. Using sales units alone, or reversing opening and closing inventory, is a common mistake.

What are the advantages of preparing budgets on a spreadsheet? Formulas recalculate every linked budget instantly when an assumption changes, which makes what-if testing quick. However, a wrong formula or hard-coded number can pass unnoticed and spread through linked budgets.

Official syllabus

Cambridge International AS & A Level Accounting 9706 syllabus for 2026, 2027 and 2028, section 4.3 Budgeting and budgetary control, published by Cambridge International.