Budgets and Variance Analysis

This lesson covers AQA A-Level Business topic 3.5.2 — analysing financial performance through budgets, budget setting, and variance analysis. You will learn how to construct and interpret budgets, calculate variances, and evaluate the usefulness of budgeting as a management tool.

---

What Is a Budget?

Key Definition: A budget is a financial plan for the future, expressed in quantitative terms, covering a defined period. It sets targets for income (revenue) and expenditure (costs) and provides a benchmark against which actual performance can be measured.

Budgets are not the same as forecasts. A forecast is a prediction of what will happen; a budget is a target of what the business wants to happen.

---

Types of Budget

Budget Type	Definition	Example
Revenue (income) budget	Forecast of expected sales revenue	Target: £500,000 revenue in Q1
Expenditure (cost) budget	Planned spending on costs	Target: keep raw material costs below £120,000
Profit budget	Revenue budget minus expenditure budget	Target: achieve £80,000 operating profit

Formula: Profit budget = Revenue budget - Expenditure budget

---

The Budget-Setting Process