5.5 Budgets

Cambridge International AS Level Business — 9609

2026 📋 Syllabus Objectives

By the end of these notes, you will be able to:

  1. Understand how budgets are used to measure business performance
  2. Explain the benefits and drawbacks of using budgets
  3. Describe the meaning and use of incremental budgets, flexible budgets, and zero budgeting
  4. Explain how budgets are used for measuring performance, allocating resources, controlling, and monitoring a business
  5. Understand the meaning of adverse variances and favourable variances
  6. Calculate and interpret variances

📖 Main Content

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1. What is a Budget?

A budget is a financial plan. It sets out how much money a business — or a department within a business — expects to earn and spend over a certain period of time (usually one year).

Think of it like a personal spending plan: before the month begins, you decide how much money you are allowed to spend on food, transport, and entertainment. A business does exactly the same thing, just on a much larger scale.

Key point: Budgets are usually closely linked to what the business is trying to achieve — its objectives. For example, if a business wants to grow its sales, its budget will reflect the extra spending needed to make that happen.

2. Uses of Budgets — An Overview

Budgets are powerful management tools. They are used in four main ways:

UseWhat it means
Measuring performanceChecking how well the business or a department is doing
Allocating resourcesDeciding where money should be spent
Controlling a businessPreventing overspending and keeping finances in check
Monitoring a businessTracking progress against targets over time

Each of these is explained in detail below.

3. Using Budgets to Measure Performance

One of the most important uses of a budget is to measure performance — in other words, to check whether the business is doing as well as it planned to.

3a. Measuring Overall Business Performance

  • Managers compare the actual figures (what really happened) with the budgeted figures (what was planned).
  • This shows whether the business is making the expected profit, controlling its costs properly, or overspending.
  • If results are better than planned, the business is performing well. If results are worse, action needs to be taken.
  • Variances (the differences between actual and budgeted figures) help explain good or poor performance. (Variances are covered in detail in Section 7.)

3b. Measuring Functional (Departmental) Performance

  • Each department — such as marketing, operations, and human resources (HR) — usually has its own separate budget.
  • Comparing a department's actual spending and results with its budget shows how well that part of the business is being managed.
  • This helps hold individual managers accountable — meaning they are responsible for how well they manage their department's money.
  • It also encourages every department to use its resources efficiently (without waste).

3c. Comparing Performance Over Time

  • Budgets allow a business to track how it is performing from one year to the next, or even from one month to the next.
  • By looking at trends over time — for example, whether costs are rising or efficiency is improving — managers can plan more effectively for the future.

3d. Comparing Performance Across Departments

  • Budgets make it possible to compare different departments at the same time, even if those departments do very different jobs.
  • This helps managers make fair decisions about things like bonuses, promotions, or giving extra funding to a department that needs it.

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