OxfordAQA A-Level Accounting: Budgeting (9615) – Revision Notes

For full explanations and longer worked examples, read the Budgeting study guide first. These notes cover section 3.1.9, Budgeting, of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. Section 3.1.9 is International AS content on Paper 2: Financial & Management Accounting. The specification states that the cash, sales, purchases, production and labour budgets “will be assessed at A-level”; those notes are marked Assessed at A-level.

Links: course hub, printable checklist, practice questions, free 10-minute diagnostics, and the sole trader statements guide for statement layouts. Every figure here is invented.

Key definitions

• Budget: a plan for a future period in money or units.
• Budgetary control: comparing actual results with the budget, investigating differences and acting.
• Budget holder: the manager responsible for a budget and its differences.
• Favourable difference: actual result better for profit than budget. Adverse: worse.
• Incremental budgeting: last period’s figure adjusted (often for inflation).
• Zero-based budgeting (ZBB): every item starts at nil and must be justified.
• Budgetary slack: padding added by a manager to make a target easier to hit.

Purposes of budgeting

Planning, co-ordination, communication, control, motivation and responsibility. For an “explain” mark, name the purpose and link it to a consequence: “co-ordination – the purchases budget is based on planned production, so materials arrive when the factory needs them”.

Formulas

Budget or figure	Formula
Sales revenue	planned units x price per unit
Production (units)	budgeted sales + target closing finished-goods inventory - finished goods held at the start
Materials used	units produced x material per unit
Purchases (units)	usage + closing materials - opening materials
Labour hours	production x hours per unit
Receipts from credit customers	opening receivables + credit sales - closing receivables
Payments to credit suppliers	opening payables + credit purchases - closing payables
Cost of sales	inventory at start + purchases - inventory at end
Closing capital	capital at start + profit for the year - drawings

The first five rows are for the functional budgets, assessed at A-level. The last four are needed for budgeted statements at International AS.

Order of preparation

Sales, then production, then materials usage, purchases and labour, then the cash budget, and finally the budgeted income statement and statement of financial position, which draw on all the others.

Method in steps: functional budgets (Assessed at A-level)

1. Sales budget in units, then money.
2. Production budget: use the closing inventory rule given, then carry each closing figure forward as the next opening figure.
3. Materials usage from production, not sales.
4. Purchases budget in units, then money.
5. Labour hours from production, then cost, splitting basic hours and overtime if a limit is given.

Worked reminder. Kelvara Hammocks plans sales of 900 hammocks, holds 120 at the start and wants 150 at the end. Production = 900 + 150 - 120 = 930 hammocks.

Method in steps: cash budget (Assessed at A-level)

1. Set out columns by month; receipts first, then payments.
2. Split sales into cash and credit; place credit receipts in the month the customer pays.
3. Deduct any cash discount from the amount received.
4. Put each payment in the month it is paid, including asset purchases, loan repayments and drawings.
5. Leave out depreciation, irrecoverable debts and provisions: no cash moves.
6. Net cash flow = receipts - payments; closing balance = opening balance + net cash flow; carry it forward.
7. Show overdrafts in brackets.

Worked reminder. Kelvara Hammocks’ sales are 14,000 in May and 16,500 in June. 25% are for cash and credit customers pay the month after sale. June receipts = 25% x 16,500 + 75% x 14,000 = 4,125 + 10,500 = 14,625. The 75% of June’s sales is received in July, outside June’s column.

Layout to copy.

                        Month 1   Month 2   Month 3
Receipts (listed)           x         x         x
Total receipts              x         x         x
Payments (listed)           x         x         x
Total payments              x         x         x
Net cash flow               x        (x)        x
Opening balance             x         x        (x)
Closing balance             x        (x)        x

Each closing balance is the next month’s opening balance.

Method in steps: budgeted statements (International AS)

1. Find revenue, purchases and expenses for the period, adjusting cash figures for accruals and prepayments.
2. Cost of sales from opening inventory, purchases and closing inventory.
3. Add depreciation for the year.
4. Work out the closing bank balance from opening bank, receipts and payments.
5. Build the statement of financial position: non-current assets at carrying amount, current assets, current liabilities, then capital (opening + profit - drawings). Check that it balances.

Worked reminder. Kelvara Hammocks budgets to pay rent of 7,800, of which 650 is for next year. The budgeted income statement charges 7,800 - 650 = 7,150; the 650 is an other receivable; the bank figure uses the full 7,800. Equipment cost 25,000 with accumulated depreciation 9,000 at the start; 20% reducing balance gives depreciation of 20% x 16,000 = 3,200 and a carrying amount of 12,800.

Must-know distinctions

Cash budget	Budgeted income statement
Records cash when it moves	Records income and expenses when earned or incurred
Includes asset purchases, loans, drawings, capital introduced	Excludes them
Excludes depreciation and irrecoverable debts	Includes them
Answers: “Will we have enough cash?”	Answers: “Will we make a profit?”

Incremental	Zero-based
Quick, cheap, easy to understand	Slow and costly
Suits stable, routine costs	Suits discretionary costs such as marketing or training
Carries past waste forward	Challenges every item
Little management skill needed	Needs trained, committed managers

Benefits and limitations in one line each

• Generic benefits: early warning of problems, co-ordination, authorised spending, a standard to measure against, accountability.
• Generic limitations: depends on forecasts, costs time, unrealistic targets demotivate, slack, rigidity.
• Sales budget: the base of all budgets; the hardest forecast.
• Production budget: steady output and inventory levels; upset by breakdowns.
• Purchases budget: avoids stock-outs and overstocking; upset by supplier problems.
• Labour budget: plans recruitment and overtime; upset by absence and turnover.
• Cash budget: shows financing needs early; upset by late payers.
• Budgeted statements: test whether the plan is profitable and solvent; inherit every other error.

Planning and control in brief

Planning: set targets and resources before the period. Control: record actual results, compare, label each difference favourable or adverse, investigate and act. Detailed variances belong to 3.2.1 (International A-level only).

Worked reminder. Kelvara’s budget for materials was 8,200 and actual 8,650: 450 adverse, because higher cost reduces profit. Budgeted sales were 31,000 and actual 32,400: 1,400 favourable. The budget holder for materials should be asked why: a supplier price rise, more wastage, or simply more output to meet the extra sales. The right action depends on the cause, so investigate before acting.

Quick self-test

1. Sales 900 units, opening finished goods 120, closing 150. Production?
2. Usage 2,400 kg, opening materials 300 kg, closing 260 kg. Purchases in kg?
3. Opening receivables 5,200, credit sales 61,000, closing receivables 6,400. Cash received?
4. Opening inventory 3,300, purchases 27,500, closing inventory 4,100. Cost of sales?
5. Why is depreciation left out of a cash budget?
6. Production 640 units, 1.5 hours per unit, 14 an hour. Labour cost?
7. March credit sales 30,000; 60% pay in April and take 2% cash discount. April receipt from these customers?
8. Define zero-based budgeting.
9. Last year’s marketing budget was 48,000. Incremental budgeting adds 5%. New budget?
10. Opening capital 52,000, budgeted profit 18,300, drawings 11,000. Budgeted closing capital?
11. Give one limitation specific to a labour budget.
12. Which budget is usually prepared first, and why?

Answers

1. 900 + 150 - 120 = 930 units.
2. 2,400 + 260 - 300 = 2,360 kg.
3. 5,200 + 61,000 - 6,400 = 59,800.
4. 3,300 + 27,500 - 4,100 = 26,700.
5. It is a non-cash expense: the cash left when the asset was bought.
6. 640 x 1.5 = 960 hours; 960 x 14 = 13,440.
7. 30,000 x 60% = 18,000; less 2% = 17,640.
8. Each budget starts from nil and every item of spending must be justified, not carried over from last year.
9. 48,000 x 1.05 = 50,400.
10. 52,000 + 18,300 - 11,000 = 59,300.
11. Absence or staff turnover means the hours planned may not be available, so overtime or agency costs rise.
12. The sales budget, because demand normally limits production, purchases, labour and cash; an error in it flows into every other budget.

Where marks are usually lost

• Calculating materials and labour from sales units instead of production units.
• Not carrying a month’s closing inventory forward as the next opening figure.
• Placing credit receipts in the month of sale.
• Forgetting the cash discount on early payments.
• Including depreciation or a provision in a cash budget.
• Omitting an asset purchase or drawings from the cash budget.
• Using cash paid, not the expense incurred, in a budgeted income statement.
• Unbalanced budgeted statement of financial position because drawings were missed.
• Listing benefits of ZBB with no limitation and no judgement in an “evaluate” answer.

Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards, published by OxfordAQA. Section 3.1.9, Budgeting.