Analysing Budgets (AQA A Level Business): Revision Note
Syllabus Edition
First teaching 2026
First exams 2028
Exam code: 7132
What is a budget variance?
A budget variance is a difference between the figure budgeted and the actual figure achieved by the end of the budgetary period
Once budgets have been set, managers regularly carry out variance analysis to compare actual performance to the targets set in the budget
Managers seek to determine the reasons for the differences between the actual figures and the budgeted figures
Types of variance
A budget variance is calculated by subtracting the budgeted figure from the actual figure
Revenue variance | Actual revenue - Budgeted revenue |
|---|---|
Cost variance | Actual costs - Budgeted costs |
Profit variance | Actual profit - Budgeted profit |
Adverse variances
An adverse variance (A) is where the actual figure achieved is worse than the budgeted figure
For income - actual income is lower than budgeted
For costs - actual costs are higher than budgeted
For profit - actual profit is lower than budgeted
Causes of adverse variances
Adverse income variance |
|
|---|---|
Adverse cost variance |
|
Worked Example
Selected financial information for Bunsen PLC (2025)
| £m |
|---|---|
Budgeted sales revenue | 12,460 |
Actual sales revenue | 13,718 |
Budgeted total costs | 8,420 |
Actual total costs | 10,627 |
Using the data, calculate the total profit variance for Bunsen PLC in 2025. You are advised to show your working.
Budgeted profit for 2025
Actual profit for 2025
Profit variance
The nature of the variance
In this case, the variance is adverse because the actual profit for 2025 is lower than the budgeted profit for 2022
The correct answer is £949 A
Favourable variances
A favourable variance (F) is where the actual figure achieved is better than the budgeted figure
For income - actual income is higher than budgeted
For costs - actual costs are lower than budgeted
For profit - actual profit is higher than budgeted
Causes of favourable variances
Favourable income variance |
|
|---|---|
Favourable cost variance |
|
Worked Example
Selected financial information for Choco Heaven Ltd (2025)
| £m |
|---|---|
Budgeted sales revenue | 3.78 |
Actual sales revenue | 4.02 |
Budgeted total costs | 2.98 |
Actual total costs | 3.04 |
Using the data, calculate the total profit variance for Choco Heaven in 2022. You are advised to show your working.
Budgeted profit for 2025
Actual profit for 2025
Profit variance
The nature of the variance
In this case, the variance is favourable because the actual profit for 2025 is higher than the budgeted profit for 2025
The correct answer is £0.18m F
Interpreting and analysing variances
Calculating variances is only the first step
The real value lies in interpreting what they mean and analysing the possible causes
An adverse variance is not always a sign of poor management
External factors, such as a rise in global commodity prices or an unexpected fall in consumer confidence, may be outside the business's control
A favourable variance is not always entirely good news
For example, if costs are significantly below budget it may mean the business has underinvested in staff, quality or marketing
This could harm future performance
This is why managers must investigate the cause of a variance before drawing conclusions
Questions managers should ask when analysing variances
Is the variance significant enough to warrant action, or is it within an acceptable range?
Is the cause internal (something the business can control) or external (outside its influence)?
Is it a one-off event or likely to continue in future months?
Does an adverse variance in one area connect to a favourable variance in another
Eg. lower sales leading to lower production costs
What action should be taken, and by whom?
Case Study
Hartfield Fitness Equipment Ltd - monthly budget versus actual results (£)
Budgeted | Actual | Variance | F or A | |
|---|---|---|---|---|
Revenue | 51,000 | 46,000 | 5,000 | A |
Cost of sales | 32,000 | 28,000 | 4,000 | F |
Gross profit | 19,000 | 18,000 | 1,000 | A |
Operating expenses | 12,200 | 13,600 | 1,400 | A |
Operating profit | 6,800 | 4,400 | 2,200 | A |
Revenue came in £5,000 below budget
This is the most significant issue
It could reflect weaker consumer demand, a competitor offering lower prices, or a failure in the sales team
Management should investigate which products underperformed and why
Cost of sales was £4,000 below budget, a favourable result
This partially offsets the revenue shortfall
It may reflect a fall in material prices or lower-than-expected production volumes (which itself may be a consequence of the lower sales)
Operating expenses exceeded budget by £1,400
This could have been due to an unplanned repair, higher-than-expected energy bills or additional staffing costs
Management should identify the specific cause and assess whether it is a one-off or a recurring issue
Overall, operating profit was £2,000 below target
A significant adverse variance that will require attention if the business is to meet its annual profit budget
Examiner Tips and Tricks
A common mistake is to assume that all favourable variances are good and all adverse variances are bad. In the exam, look deeper - an adverse cost variance may reflect the business investing in quality or staff development, which could improve performance in the long run. Always consider the context and ask what the variance tells us about the underlying health of the business
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