IB DP Business Management: Budgets (HL only) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

These questions cover section 3.9, Budgets (HL only), in Unit 3 of the IB Business management guide, first assessment 2024. All of the section is HL only. Businesses and figures are invented. Variances use the standard form actual minus budget, with percentages taken on the budget figure.

Links: study guide, revision notes, the course hub, the syllabus checklist and the free diagnostics.

Questions

1. Distinguish between a cost centre and a profit centre. [2]

2. Orrinhall Hotel is divided into parts. State whether each of these is better treated as a cost centre or a profit centre: (i) the maintenance team, (ii) the restaurant, (iii) the housekeeping team. [3]

3. Explain one role of a cost centre and one role of a profit centre in a business such as Orrinhall Hotel. [4]

4. Orrinhall’s housekeeping team had a monthly budget of 5,400 dollars. Actual spending was 5,832 dollars. Calculate the variance, express it as a percentage of the budget, and state whether it is favorable or adverse. [3]

5. The hotel restaurant is a profit centre. For next month the manager expects to serve 1,400 meals at an average price of 18 dollars. Food costs are 35% of sales revenue, staff costs are 9,500 dollars and utilities are 1,800 dollars. Construct the restaurant’s budget for the month, showing the budgeted profit. [4]

6. At the month end the restaurant served 1,260 meals at an average price of 19 dollars. Food costs were 7,900 dollars, staff costs were 9,500 dollars and utilities were 2,100 dollars. Using your budget from question 5, calculate the variance for each line and for profit, labeling each favorable (F) or adverse (A). [6]

7. Cedarquay Cycles treats its assembly workshop as a profit centre. Its six-month budget assumes sales of 120, 140, 160, 180, 200 and 200 bicycles, at 340 dollars each. Variable costs are 210 dollars per bicycle and fixed costs are 14,500 dollars a month. Actual six-month results were sales revenue 335,700 dollars, variable costs 215,000 dollars and fixed costs 90,300 dollars.

(a) Calculate the budgeted revenue, total variable costs and profit for the six months. [3] (b) Calculate the variance for revenue, variable costs, fixed costs and profit, with F or A and the profit variance as a percentage of budget. [4] (c) Suggest two possible reasons for the variances. [2]

8. Explain why a favorable cost variance is not always good news for a business. [3]

9. Using the Cedarquay Cycles data in question 7, evaluate the importance of budgets and variances in the decision-making of its managers. [8]

10. Orrinhall’s spa is a profit centre with a monthly budget of 36,000 dollars sales revenue and 30,000 dollars costs. Actual sales revenue was 33,300 dollars and costs were 31,500 dollars. The owner proposes closing the spa. The hotel estimates that 40% of spa guests also book a room, and therapists are on contracts that run to the end of the year.

(a) Calculate the spa’s budgeted profit, its actual profit, and the profit variance as a percentage of budget. [3] (b) Recommend whether the owner should close the spa. [5]

Answers

1. A cost centre is a part of a business for which costs are collected but no revenue is attributed [1]. A profit centre is a part for which both costs and revenue are identified, so its profit can be measured [1]. [2] Examiner insight: A “distinguish” answer gains credit for stating a difference between the two, not for defining each in isolation without contrast.

2. (i) Maintenance team: cost centre [1]. (ii) Restaurant: profit centre [1]. (iii) Housekeeping team: cost centre [1]. [3] Examiner insight: A one-word classification is enough for each line. A reason is useful but is not needed to gain the credit.

3. Cost centre: it gives the manager a spending limit [1], so that the manager is accountable for keeping the housekeeping or maintenance cost within it [1]. Profit centre: it lets the owner judge how much the restaurant earns after its costs [1], which helps decide where to invest or what to review [1]. [4] Examiner insight: Explanation answers tend to need a role plus a developed consequence. Naming a role alone usually earns only part of the marks.

4. Variance = 5,832 − 5,400 = 432 dollars [1]. Percentage = 432 ÷ 5,400 × 100 = 8.0% [1]. Cost above budget, so the variance is adverse [1]. [3] Examiner insight: Show the working. A sign or letter that matches the item (cost higher than budget is adverse) is part of a complete answer.

5. Sales revenue = 1,400 × 18 = 25,200 [1]. Food costs = 35% × 25,200 = 8,820 [1]. Staff 9,500 + utilities 1,800 = 11,300 [1]. Budgeted profit = 25,200 − 8,820 − 11,300 = 5,080 dollars [1]. [4] Examiner insight: A tidy layout with a heading for each line makes it easy to see how each figure was reached. State the assumptions behind the forecast if the question asks for them.

6. Actual revenue = 1,260 × 19 = 23,940. Revenue variance = 23,940 − 25,200 = −1,260, adverse [1]. Food costs: 7,900 − 8,820 = −920, favorable [1]. Staff costs: 0, no variance [1]. Utilities: 2,100 − 1,800 = +300, adverse [1]. Actual profit = 23,940 − 7,900 − 9,500 − 2,100 = 4,440 [1]. Profit variance = 4,440 − 5,080 = −640, adverse, which is 12.6% of budget [1]. [6] Examiner insight: The favorable food-cost variance partly reflects fewer meals sold, so the better answers do not treat it as a sign of efficiency without checking the volume.

7. (a) Units = 1,000, so revenue = 1,000 × 340 = 340,000 [1]. Variable costs = 1,000 × 210 = 210,000 [1]. Fixed costs = 6 × 14,500 = 87,000, so profit = 340,000 − 210,000 − 87,000 = 43,000 dollars [1]. [3] (b) Revenue: 335,700 − 340,000 = −4,300, adverse (1.3% below budget) [1]. Variable costs: 215,000 − 210,000 = +5,000, adverse [1]. Fixed costs: 90,300 − 87,000 = +3,300, adverse [1]. Actual profit = 335,700 − 215,000 − 90,300 = 30,400, so the profit variance is −12,600, adverse, which is 29.3% of budget [1]. [4] (c) Any two relevant reasons, one mark each, such as: price discounts or weak demand reduced revenue [1]; a supplier price rise or waste increased variable costs [1]. [2] Examiner insight: A reason gains more credit when it fits the figure. A revenue shortfall explained by “higher demand” contradicts the data.

8. A cost below budget increases profit [1]. However, the saving may have come from cutting quality, delaying maintenance or buying fewer inputs than the sales plan needed [1], which could harm customer satisfaction or output in later periods [1]. [3] Examiner insight: “Explain” calls for the idea and its consequence. Say what could have caused the saving and why that matters.

9. Benefits:

• The budget gave a profit target of 43,000 dollars that the managers could plan towards [1].
• The variances showed that profit finished 12,600 dollars, or 29.3%, below target, which flagged a problem [1].
• All three variances were adverse, so managers can see that price, variable cost and fixed cost all need review rather than one area alone [1].

Limits:

• A variance shows what happened but not why, so managers must investigate before acting [1].
• The budget rests on forecast sales rising to 200 bicycles a month, which may have been optimistic [1].
• Revenue was only 1.3% below budget but profit was 29.3% below, so a small revenue miss became a large profit miss because costs also rose [1].

Judgment: the budget and variances were important because they made the problem visible and pointed to cost control as well as sales [1]. Their value depends on managers investigating causes and revising assumptions, because the figures alone do not say what to change [1]. [8] Examiner insight: An “evaluate” answer is stronger when it uses numbers from the case in both the benefits and the limits, then ends with a judgment that depends on a condition.

10. (a) Budgeted profit = 36,000 − 30,000 = 6,000 [1]. Actual profit = 33,300 − 31,500 = 1,800 [1]. Variance = −4,200 dollars, which is −70.0% of budget (adverse) [1]. [3] (b) The profit is 70% below plan, which is a serious adverse variance [1]. However, revenue was only 7.5% below budget and costs 5.0% above, so small changes on a thin margin produced a large effect [1]. About 40% of spa guests also book rooms, so closing the spa could cut room revenue that the spa profit figure does not show [1]. Therapist contracts run to the end of the year, so most savings from closing could not be made at once [1]. Recommendation: do not close the spa yet. Investigate why revenue and costs missed the budget, set a revised budget, and review the variance again before the contracts end [1]. [5] Examiner insight: A recommendation is stronger when the decision follows from the evidence given in the stem and is not a statement of opinion. Use the extra information in the case.

Where marks are usually lost

• Treating any positive variance as favorable, without checking whether the item is revenue or cost.
• Calculating the percentage on the actual figure instead of the budget.
• Leaving out the F or A label.
• Calling a cost centre a department that makes a loss, when the key point is that it records costs only.
• Constructing a budget without totals, or with a fixed cost multiplied by units.
• Giving a cause of a variance that contradicts the data.
• Listing benefits of budgeting that are not linked to the business in the case.
• Stopping an “evaluate” or “recommend” answer without weighing both sides or reaching a judgment.

Next steps

• Revisit the revision notes and the study guide.
• See the IB DP Business Management hub and the syllabus checklist.
• Try all free 10-minute diagnostics at /diagnostics/.
• Book a free trial class at /trial/.

Frequently asked questions

Is the budgets topic for SL or HL in IB Business Management? Section 3.9 Budgets is HL only in the IB DP Business Management guide, first assessment 2024. It covers cost and profit centres, constructing a budget, variances and budgets in decision-making.

Is a positive variance always favorable? No. A variance is favorable if it increases profit and adverse if it reduces profit, so a cost that is above budget gives a positive but adverse variance.

How do you calculate a variance as a percentage? Divide the variance by the budgeted figure and multiply by 100. Dividing by the actual figure is a common error.

What should you add after calculating a variance? Label it F or A, then give a cause that fits the data in the case, such as price discounts, supplier price rises or overtime.

Official syllabus

IB Diploma Programme Business management guide, first assessment 2024, published by the International Baccalaureate Organization. This page covers section 3.9, Budgets (HL only).