A budget is a plan with numbers in it. Variance analysis shows where reality has moved away from the plan, so managers can decide what to do next.
If a variance is positive, is that good news or bad news?
A budget is a financial plan for a future period, set as targets for income and spending. Variance analysis compares budgeted and actual figures using budgeted minus actual, then explains the gap. Zero-based budgeting starts every budget from zero, so each cost must be justified. Budgets help control and motivate, but only if managers act on the variances.
Year 12 (7137/7138): This is AS (the first-year qualification) content in Unit 3.1.4, so it can be set from the 2027 AS exams. It is also in A-level Paper 1 from 2028. Learn the variance formula, the sign rule and zero-based budgeting well. You can be asked to define, explain, analyse, assess and calculate.
Year 13 (7132, June 2027): Your final exams are on the outgoing specification. Budgets sit within your financial performance work. Use this page to firm up the variance calculation and the evaluation points. Treat zero-based budgeting as extra depth that can strengthen a financial control answer.
A budget is a financial plan for a future period. It sets targets for income, spending and often profit. Each department usually has its own budget.
Incremental budgeting starts from last year's figure and adds or subtracts a percentage. Zero-based budgeting (ZBB) starts every period at zero. Each manager must justify every item of spending against the business's objectives.
This can expose waste, because old habits no longer carry through unchallenged. It also takes a lot of management time.
A variance is the gap between the budget and what actually happened. The specification gives one formula.
The sign alone does not tell you adverse or favourable. It depends on the type of item.
Always ask one question: did this gap make profit higher or lower than planned?
Illustrative figures for a small bakery-café, for one month.
| Item | Budget (£) | Actual (£) | Variance (£) | Label |
|---|---|---|---|---|
| Sales revenue | 40,000 | 36,000 | +4,000 | Adverse |
| Ingredients | 14,000 | 15,500 | -1,500 | Adverse |
| Wages | 12,000 | 11,400 | +600 | Favourable |
| Rent | 3,000 | 3,000 | 0 | No variance |
| Profit | 11,000 | 6,100 | +4,900 | Adverse |
Budgeted profit is 40,000 - 14,000 - 12,000 - 3,000 = £11,000. Actual profit is 36,000 - 15,500 - 11,400 - 3,000 = £6,100. The profit variance is £4,900 adverse.
The parts add up: 4,000 + 1,500 - 600 = 4,900. The main cause is lower sales, so that is where the manager should look first.
The cycle has four steps. Managers set budgets from the objectives. They record actual results each month. They calculate variances. They investigate the causes and decide what to change.
The fourth step carries the value. A variance on its own is only a number, so the cause matters more than the size.
Network Rail, which runs Britain's railway infrastructure, shows this clearly. The Office of Rail and Road (ORR), its regulator, reported that Network Rail spent £243 million more than originally planned in 2024-25, the first year of its five-year plan period (Control Period 7).[2] In 2025-26 the figure was £490 million more than originally planned.[1]
The ORR linked the 2025-26 gap to inflationary pressures, maintenance of ageing assets and train performance issues.[1] So the variance was a signal that cost pressures needed managing, not just a number to report.
Who sets the budget also matters. In top-down budgeting, senior managers impose figures, which is fast but can demotivate. In participative budgeting, budget holders help set them, which gives better local knowledge and more commitment, but takes longer.
Budgets are useful, but they are only as good as the assumptions behind them. In an assess or evaluate answer, say what the value depends on.
A strong judgement links these points to the case. For example, budgets are most valuable when the business can act quickly on the variance, because the information then changes a decision.
Annex 8 of the specification lists sophisticated concepts that are credited when used accurately. Budgets are not a named model there, but accurate use of the variance formula and correct labelling still earn AO1 and AO3 marks. (AO means assessment objective.)
Every AQA Business question uses one of five command words, each with a fixed mark tariff, and quantitative questions sit inside the 9 and 15-mark formats. The A-level papers have no 2 or 4-mark questions. Open each format to see how this topic appears in it. All questions here are original Curriculum Circle practice questions, not board questions.
On this topicAsks for a precise meaning of a term such as budget, adverse variance or zero-based budgeting.
What earns the marksAO1 only: a correct definition for the first mark and a developed point for the second.
CC practice questionDefine the term 'zero-based budgeting'. (2 marks)
On this topicAsks why a business uses budgets, or what a variance shows, with a link to the case business.
What earns the marksAO1 for the idea and AO2 for applying it to the named business.
CC practice questionExplain one reason why a regional bus company might set a budget for each depot. (4 marks)
On this topicAsks you to build a short chain: a budget feature, a business effect, then a consequence for profit or control.
What earns the marksAO1 and AO2 for knowledge and context, then AO3 for a developed chain of reasoning.
CC practice questionAnalyse how an adverse variance on ingredient costs might affect a bakery-café. (6 marks)
On this topicAsks for arguments for and against a budgeting approach or decision, then a judgement on its value.
What earns the marksAO1 to AO3 for balanced analysis, and AO4 for a judgement that says what the answer depends on.
CC practice questionAssess the value of budgeting to a fast-growing online retailer. (9 marks)
On this topicAsks you to choose between two courses of action, such as ZBB or incremental budgeting, and recommend one.
What earns the marksAO1 to AO3 for developed arguments on both options, and AO4 for a justified recommendation using the case evidence.
CC practice questionEvaluate whether a supermarket chain should replace incremental budgeting with zero-based budgeting, or keep its current method. (15 marks)
On this topicGives budgeted and actual data. You calculate variances, label them, and use them in an assess or evaluate answer.
What earns the marksAO1 for the correct formula and AO2 for using the data, then AO3 and AO4 for explaining causes and judging what to do.
CC practice questionA garden centre budgeted sales of £250,000 and costs of £190,000. Actual sales were £231,000 and actual costs £201,000. Calculate the profit variance, state whether it is adverse or favourable, and assess how the manager should respond. (9 marks)
| Weight | What it is | What it means on budgets and variance analysis | |
|---|---|---|---|
| AO1 | 32.5% AS · 24.44% A-level | Knowledge and understanding of terms, concepts, theories, methods and models | Know the purpose of budgets, what ZBB means, and the variance formula exactly as written. Label adverse and favourable correctly. |
| AO2 | 27.5% AS · 24.44% A-level | Application to the business context in the case study | Use the case figures and context. Name the department, product or cost line, and say why it matters to that business. |
| AO3 | 20% AS · 26.66% A-level | Analysis of issues and their impact on individuals and organisations | Build chains such as: sales fall below budget, so revenue is lower, so profit is lower, so funding for investment is reduced. |
| AO4 | 20% AS · 24.44% A-level | Evaluation of quantitative and qualitative information to make judgements | Judge the value of budgets or ZBB by saying what it depends on, such as forecast accuracy, flexibility and the cause of the variance. |
Weightings are approximate and taken from the AQA AS 7137 and A-level 7138 specification [0].
Harbour Bakes, a growing chain of bakery-cafés, has missed its profit budget for three months in a row. Evaluate whether it should adopt zero-based budgeting or keep its current incremental budgeting. (15 marks)
Zero-based budgeting would make each café manager justify every cost from zero, so waste such as unused ingredients or excess overtime is more likely to be found. Lower costs would turn adverse cost variances towards favourable, so profit would move closer to the target. Incremental budgeting is quicker, because managers only adjust last year's figures. It keeps management time free for serving customers, but it can carry old inefficiencies forward, so costs stay high.
Zero-based budgeting is more convincing if the main cause of the profit gap is cost control. The data show the larger variance is on sales, so cutting costs may not fix the problem. ZBB could also lead managers to cut marketing or staff training, which could reduce sales further in the long run. The better recommendation is to keep incremental budgeting for stable lines and use ZBB once, on the cost lines with the largest adverse variances. This is because it targets waste without the heavy time cost across all cafés. The judgement would change if Harbour Bakes found costs were rising across every café.
The Office of Rail and Road reported that Network Rail financially underperformed by £490 million in 2025-26 against its delivery plan, meaning it spent £490 million more than originally planned. In the same year Network Rail delivered £614 million of efficiency improvements, 4% ahead of the regulator's target of £589 million.[1] The case shows a large adverse variance can sit alongside good efficiency results.
AdNews reported on 20 January 2016 that zero-based budgeting requires managers to justify marketing budgets from scratch every year. It said the approach had been rolled out by equity firm 3G Capital for global firms such as Kraft Heinz.[3] The case shows ZBB is a method that owners can impose across a group of businesses.
In January 2016, Unilever announced a global rollout of zero-based budgeting, with marketing managers building budgets from scratch and justifying spending. Marketing Dive, citing Ad Age, reported that a Thailand trial in the previous year had reduced spending by 2% as a percentage of sales.[4] This shows ZBB can target waste in a named cost area, such as marketing.
Everything above is the topic page. The pieces below take it further. Each one trains a particular assessment objective rather than covering the topic again, and they are added over the year.
Figures and facts were checked against these sources on 2 November 2026. Worked numbers labelled "Illustrative figures" are invented for teaching.
The CC Business revision platform has more variance practice with the Criterion Marking Engine, and the Inner Academy's recorded lessons walk through each calculation.
See the Business platformThe Inner Academy