OxfordAQA A-Level Accounting: Budgeting (9615)

This study guide teaches 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, assessed on Paper 2: Financial & Management Accounting. The specification adds that the cash, sales, purchases, production and labour budgets “will be assessed at A-level”, so those parts are marked Assessed at A-level below. The specification notes that A-level assessments build upon what was learned at AS.

Useful pages: the OxfordAQA A-level Accounting hub, the printable checklist and the free 10-minute diagnostics. After this guide, use the revision notes and the practice questions. Budgeted statements use the layouts from preparing sole trader financial statements, and the exam preparation page explains how Paper 2 is set out.

What section 3.1.9 covers

Content (3.1.9)	What you must be able to do	Level
The need for budgeting in business organisations	Say why organisations prepare budgets	International AS
The benefits and limitations of budgeting and budgetary control	Give generic benefits and limitations, those of specific budgets, and of zero-based and incremental budgeting	International AS
Accounting techniques in the preparation and analysis of budgets	Draw up budgeted versions of the income statement and statement of financial position	International AS
	Prepare cash, sales, purchases, production and labour budgets	Assessed at A-level
How budgets are used in planning and control	Compare budget with actual results and explain the action managers take	International AS

All figures on this page are invented.

The need for budgeting

A budget sets out, in money or in units, what a business intends to happen over a future period. Budgetary control is the process of comparing actual results with the budget, finding the differences and acting on them.

The purpose of budgeting is to help managers run the business deliberately rather than react to events:

• Planning. Managers must think ahead about sales, resources and finance.
• Co-ordination. Each department’s budget must fit the others. Production cannot exceed what purchasing can supply or what sales can sell.
• Communication. Staff learn what is expected of them.
• Control. The budget is a yardstick against which actual results are measured.
• Motivation. A realistic target gives managers something to aim for.
• Responsibility. Each budget has a named holder who answers for its differences.

Benefits and limitations

Generic benefits and limitations

Benefits	Limitations
Problems are spotted before they happen	A budget is only as good as its forecasts
Departments work towards the same goals	Preparing budgets takes time and money
Spending is authorised in advance	Targets that are too hard demotivate; too easy and staff coast
Performance can be measured against a standard	Managers may pad budgets with slack to make targets easy
Managers are accountable for their areas	A rigid budget can stop managers reacting to new opportunities

Benefits and limitations of specific budgets

• Sales budget. Usually prepared first, because demand normally limits everything else. Its weakness is that it is the hardest forecast to get right, and every other budget inherits its errors.
• Production budget. Plans output so finished-goods inventory stays at the target level and the factory is neither idle nor overstretched. Limited if machine breakdowns or staff shortages occur.
• Purchases budget. Avoids running out of materials and avoids tying cash up in excess inventory. Limited by supplier price changes and delivery delays.
• Labour budget. Shows when to recruit, train or plan overtime. Limited by staff turnover and absence, and by how accurately the time per unit is estimated.
• Cash budget. Shows when an overdraft or loan will be needed, so finance can be arranged early, and when surplus cash could be invested. Limited because customers may pay late.
• Budgeted income statement and statement of financial position. Reveal whether the combined plans give an acceptable profit and a healthy financial position. Limited because they rest on every other forecast.

Incremental and zero-based budgeting

With incremental budgeting, the starting point is the previous period’s figure, which is then adjusted, for example by an allowance for inflation. It is quick and cheap and suits stable costs. But it carries past waste forward and gives managers no reason to question spending.

Zero-based budgeting (ZBB) starts every budget from nil. Managers must defend every item of spending before it is included. This strips out waste and moves money to current priorities. But it is slow, needs skilled managers, and can favour spending whose benefits are easy to measure.

Budgeted financial statements (International AS)

A budgeted income statement and statement of financial position use the same layouts as the real statements. The skill is working out each figure from the plan.

Worked example 1: Ravensmere Kites

Odette Brannigan owns Ravensmere Kites. Her statement of financial position at 1 January 2027 showed: equipment at cost 40,000, accumulated depreciation 12,000; inventory 6,000; trade receivables 4,500; bank 2,300; trade payables 3,800; capital 37,000.

Budget for the year ending 31 December 2027:

• Revenue 96,000, all on credit; closing trade receivables 8,000.
• Purchases 52,000, all on credit; closing trade payables 4,300.
• Closing inventory 7,500.
• General expenses paid 21,400; a further 600 will be owing at the year end.
• Depreciation 10% a year on cost (straight line). Drawings 15,000. No new non-current assets.

Step 1: budgeted income statement

Ravensmere Kites
Budgeted income statement for the year ending 31 December 2027
Revenue                                   96,000
Cost of sales: Opening inventory   6,000
               Purchases          52,000
                                  58,000
               Closing inventory  (7,500)  (50,500)
Gross profit                              45,500
Expenses: General expenses        22,000
          Depreciation             4,000   (26,000)
Profit for the year                       19,500

General expenses are 21,400 + 600 = 22,000 (accruals). Depreciation is 10% x 40,000 = 4,000.

Step 2: budgeted bank balance

• Receipts from customers: 4,500 + 96,000 - 8,000 = 92,500.
• Payments to suppliers: 3,800 + 52,000 - 4,300 = 51,500.
• Closing bank: 2,300 + 92,500 - 51,500 - 21,400 - 15,000 = 6,900.

Step 3: budgeted statement of financial position

Ravensmere Kites
Budgeted statement of financial position as at 31 December 2027
Non-current assets: Equipment (40,000 - 16,000)         24,000
Current assets: Inventory            7,500
                Trade receivables    8,000
                Bank                 6,900
                                    22,400
Current liabilities: Trade payables  4,300
                     Other payables    600
                                    (4,900)
Net current assets                              17,500
Net assets                                      41,500
Capital: Opening balance                        37,000
         Add profit for the year                19,500
         Less drawings                         (15,000)
                                                41,500

The budget shows a profit of 19,500 but cash rises by only 4,600, because receivables and inventory grow and drawings take 15,000 out.

Functional budgets (Assessed at A-level)

The order matters: sales, then production, then purchases and labour, then cash.

Production (units) = budgeted sales + closing inventory of finished goods - opening inventory of finished goods

Purchases (units) = materials used in production + closing materials inventory - opening materials inventory

Worked example 2: Quillfield Lanterns

Quillfield Lanterns plans sales of 1,200 lanterns in January 2027, 1,500 in February, 1,400 in March and 1,600 in April, at 45 each. Closing finished-goods inventory is 20% of next month’s sales; opening inventory on 1 January is 250. Each lantern uses 0.5 kg of tin sheet at 8 per kg; closing materials inventory is 25% of next month’s usage; 150 kg is held on 1 January. Each lantern takes 0.8 labour hours. Up to 1,100 hours a month are paid at 15 an hour; extra hours are overtime at time-and-a-half.

Sales budget	January	February	March
Units	1,200	1,500	1,400
Revenue (x 45)	54,000	67,500	63,000

Production budget (units)	January	February	March
Sales	1,200	1,500	1,400
Add closing inventory	300	280	320
Less opening inventory	(250)	(300)	(280)
Production	1,250	1,480	1,440

Purchases budget	January	February
Usage (kg)	625	740
Add closing inventory (kg)	185	180
Less opening inventory (kg)	(150)	(185)
Purchases (kg)	660	735
Purchases (x 8)	5,280	5,880

Labour budget	January	February	March
Hours (production x 0.8)	1,000	1,184	1,152
Basic hours at 15	15,000	16,500	16,500
Overtime hours at 22.50	0	84 hours: 1,890	52 hours: 1,170
Labour cost	15,000	18,390	17,670

February’s closing inventory is 20% x 1,400 = 280. Carry each closing inventory figure forward: it is the opening figure for the following month.

The cash budget (Assessed at A-level)

A cash budget lists receipts and payments in the month the cash actually moves. Non-cash items, such as depreciation and irrecoverable debts, never appear. Capital items, such as an asset purchase or a loan received, do appear.

Worked example 3: Brasswick Ferments

Brasswick Ferments has 3,200 in the bank on 1 April 2027. Sales: March 24,000, April 22,000, May 26,000, June 30,000. 30% are cash sales; credit customers pay the month after sale. Credit purchases (February 11,000, March 12,500, April 13,000) are paid two months after purchase. Wages are 5,400 a month. Rent of 9,000 a quarter is paid in April. Other expenses of 2,100 a month are paid as incurred. A new tank costing 18,000 is paid for in May. Depreciation is 650 a month. Drawings are 1,500 a month.

	April	May	June
Cash sales	6,600	7,800	9,000
Credit customers	16,800	15,400	18,200
Total receipts	23,400	23,200	27,200
Suppliers	11,000	12,500	13,000
Wages	5,400	5,400	5,400
Rent	9,000
Other expenses	2,100	2,100	2,100
Tank		18,000
Drawings	1,500	1,500	1,500
Total payments	29,000	39,500	22,000
Net cash flow	(5,600)	(16,300)	5,200
Opening balance	3,200	(2,400)	(18,700)
Closing balance	(2,400)	(18,700)	(13,500)

Depreciation of 650 is left out: no cash moves. The budget shows the owner needs an overdraft facility of at least 18,700 by May, or must delay the tank, lease it or negotiate longer supplier credit.

Budgets in planning and control

Planning happens before the period: the budget sets targets and resources. Control happens during and after it:

1. Record actual results.
2. Compare each line with the budget. A difference that raises profit is favourable; one that reduces profit is adverse.
3. Investigate the causes of significant differences.
4. Act: change methods, retrain staff, renegotiate prices, or revise the budget if conditions changed.

In January Quillfield’s actual revenue was 52,650 against a budget of 54,000: 1,350 adverse. Actual labour cost was 15,840 against 15,000: 840 adverse. The production manager answers for labour and the sales manager for revenue. Splitting differences into detailed variances is section 3.2.1, Standard costing and variance analysis, which is International A-level only.

Common errors to avoid

• Putting depreciation in a cash budget, or leaving it out of a budgeted income statement.
• Using sales instead of production to calculate materials usage and labour hours.
• Forgetting that closing inventory becomes next month’s opening inventory.
• Entering a credit sale in the month of sale in the cash budget.
• Using the cash paid for an expense in the income statement when there is an accrual or prepayment.
• Leaving drawings out of the bank balance, or treating them as an expense.
• Losing the bracket on an overdrawn balance carried into the next month.

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.