Which part makes the money?: Lena's Bakery Ltd made a profit before interest and tax of $85,000 in 2025. That is one number for the whole business.
Lena wants to know more. Is the High Street shop doing better than Park Road? What does it cost to run the Mill Lane bakehouse every night?
To find out, a business splits itself into parts and keeps a separate record of the money for each. A part that only has costs is a cost centre. A part that has costs and also brings in revenue is a profit centre: its revenue minus its costs shows the profit it makes.
A centre can be a shop, a department, a product or a region: any part whose money can be recorded on its own. At the bakery, each shop is charged for the bread and cakes it takes from Mill Lane, so a shop's profit counts what its bread cost to bake.
| Part of the bakery | Its costs | Its revenue | So it is a |
|---|---|---|---|
| High Street shop (Aisha) | Bread and cakes from Mill Lane, counter wages, rent, electricity | Everything sold over the counter | Profit centre |
| Market Square shop (Kofi) | The same kinds of cost | Its own tills | Profit centre |
| Park Road shop (Jonas) | The same kinds of cost | Its own tills | Profit centre |
| Mill Lane bakehouse (Priti) | Flour from Valley Grain, bakers' wages, gas and electricity for the ovens, the vans | None: no customer buys anything at Mill Lane | Cost centre |
A cost centre is not a failing part: Mill Lane takes no money from customers, yet without it no shop has bread to sell. A cost centre often does work the whole business depends on: baking, the accounts, cleaning, IT.
So a cost centre is judged by whether it keeps its costs under control, not by its profit. It has no profit to show.
A centre can change type. In 3.3.2 Lena weighed renting the Mill Lane ovens by day to Delia's Kitchen, a caterer, at $150 a day. If she does, Mill Lane will bring in revenue of its own. With its costs and that revenue recorded together, it could be run as a profit centre.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
Three managers, three results: Suppose Lena gives each shop manager a monthly profit figure of their own. Aisha, Kofi and Jonas can now see exactly how their shop is doing, and so can Lena.
What changes when a business is run this way?
Cost and profit centres give each part of the business its own record and a person who answers for it (is accountable for it). That helps the business in several ways, and it brings problems of its own.
What centres make possible
- See where money is made and spent: which shop earns most, what Mill Lane costs a night
- Hold one person answerable: if wages overspend, the record shows which shop
- Motivate: each manager has a figure to beat and can compare with the other shops
- Quicker decisions: Aisha can act for High Street without waiting for Lena
The drawbacks
- Rivalry: managers may put their own shop first and stop sharing staff or stock
- Short cuts: cutting costs to lift one shop's profit can hurt quality and the bakery's name
- Time and money to keep a separate record for every centre and to check it
- Shared costs are hard to split: whose is the advertising, whose is Lena's salary?
Splitting a shared cost: For March 2026 Lena plans $1,500 of advertising that names all three shops. She splits it by each shop's share of sales: High Street 40%, Market Square 35%, Park Road 25%. That is $600, $525 and $375.
Split in equal thirds instead, $500 each, every shop's profit would change. So the rule for sharing a cost is something managers can argue about.
| Cost centre | Profit centre | |
|---|---|---|
| Records | Costs only | Costs and revenue |
| Judged by | Keeping its costs within the plan | The profit it makes |
| At the bakery | Mill Lane bakehouse | High Street, Market Square and Park Road |
| The manager answers for | What it spends | What it earns and what it spends |
See how examiners mark answers
Access past paper questions with model answers. Learn exactly what earns marks and what doesn't.
Aisha's plan for March: Before March 2026 begins, Aisha sits down with Lena and Marco. Together they agree what the High Street shop should sell in the month and what it may spend.
In 2.2.4 Aisha bought a $3,500 fridge that was not in the shop's budget. This is where that budget comes from.
A budget is a plan, in money, of the revenue a business expects and the costs it may spend over a set period, agreed in advance. It is usually set for a year and split into months.
It is a target the manager agrees to work to. It can be set for the whole business or for each cost and profit centre.
Building the High Street budget for March 2026
Revenue first
From last March's tills, with a small rise planned: budgeted sales revenue $50,000.
Then each cost
Bread and cakes from Mill Lane $20,000 (40% of sales). Wages for Aisha and four counter staff $14,000. Rent $4,000. Electricity $1,000. Advertising $600, the shop's share of the $1,500.
Total costs
$20,000 + $14,000 + $4,000 + $1,000 + $600 = $39,600.
The bottom line
Revenue minus costs is called the excess of revenue over costs: $50,000 − $39,600 = $10,400. It is the profit the shop is planned to make in March.
Why bother?: The budget gives Aisha a target and a limit, and it tells Priti at Mill Lane how much bread to plan for.
And once March is over, it gives Lena something to hold the real figures against.
Where do the figures come from? Last year's actual figures, what the business plans to change, and what it expects in the market.
The people who will work to a budget should help set it. A target set too high is one managers give up on; one set too low is beaten without trying.
March is over: The tills at High Street took $47,000 in March, not $50,000. It rained for most of the month and fewer people walked past the shop.
Lena puts what really happened (the actual figures) next to the plan.
The difference between a budgeted figure and the actual figure is a variance. It is written as an amount with a letter that says whether it helped profit or hurt it.
Favourable [F]: better for profit than planned. Revenue above budget, or a cost below budget.
Adverse [A]: worse for profit than planned. Revenue below budget, or a cost above budget.
| High Street shop, March 2026 ($) | Budgeted | Actual | Variance |
|---|---|---|---|
| Revenue | |||
| Sales revenue | 50,000 | 47,000 | 3,000 [A] |
| Total revenue | 50,000 | 47,000 | 3,000 [A] |
| Costs | |||
| Bread and cakes from Mill Lane | 20,000 | 18,800 | 1,200 [F] |
| Wages | 14,000 | 14,600 | 600 [A] |
| Rent | 4,000 | 4,000 | 0 |
| Electricity | 1,000 | 1,200 | 200 [A] |
| Advertising | 600 | 400 | 200 [F] |
| Total costs | 39,600 | 39,000 | 600 [F] |
| Excess of revenue over (under) costs | 10,400 | 8,000 | 2,400 [A] |
Four of the variances, worked
Sales revenue
$50,000 − $47,000 = $3,000. Revenue came in below the plan: $3,000 [A].
Bread and cakes
$20,000 − $18,800 = $1,200. Less was spent than planned: $1,200 [F].
Wages
$14,600 − $14,000 = $600. More was spent: a counter assistant was off sick and the others worked extra hours. $600 [A].
The bottom line
$10,400 − $8,000 = $2,400 [A].
Check: $3,000 [A] on revenue, less $600 [F] on total costs, leaves $2,400 [A].
The number first, then the letter: Take the smaller figure from the larger, so every variance is a positive amount. Then ask one question: did this help profit or hurt it? The same $600 is adverse on a cost line and would be favourable on a revenue line.
A variance with no [A] or [F] is only half an answer. A variance of 0 needs no letter.
Study smarter, not longer
Most students waste 40% of study time on topics they already know. Our AI tracks your progress and optimizes every minute.
A table with gaps: A variance table often comes with a figure left out. If you know two of the three (budgeted, actual, variance) and whether the variance is [A] or [F], you can always find the third.
| What is missing | How to find it | At High Street in March |
|---|---|---|
| An actual cost | Adverse: budget + variance. Favourable: budget − variance | Advertising: $600 − $200 [F] = $400 |
| A budgeted cost | Adverse: actual − variance. Favourable: actual + variance | Wages: $14,600 − $600 [A] = $14,000 |
| Actual revenue | Favourable: budget + variance. Adverse: budget − variance | Sales revenue: $50,000 − $3,000 [A] = $47,000 |
| A total or the bottom line | Add the lines; excess of revenue over costs = total revenue − total costs | Actual: $47,000 − $39,000 = $8,000 |
Some variances are built up from smaller ones. Kofi's Market Square shop planned to sell 380 loaves a day in January 2026 and sold 360 a day: 20 loaves a day fewer, at $3 each.
A revenue variance built up in steps
Per day
20 loaves × $3 = $60 a day [A].
Per month
$60 × 31 days = $1,860 [A] for January.
The next two months
February: 20 loaves a day more than planned, 20 × $3 × 28 = $1,680 [F].
March: 10 a day fewer, 10 × $3 × 31 = $930 [A].
Net them off
Adverse: $1,860 + $930 = $2,790. Favourable: $1,680.
$2,790 − $1,680 = $1,110 [A] for the three months.
Adverse and favourable do not simply add up: Add all the adverse variances, add all the favourable ones, then take the smaller total from the larger. The answer takes the letter of the larger total.
Write each step down: the day, the month, the two totals.
$2,400 short. Now what?: The High Street shop made $2,400 less than planned in March. A variance shows where the real month left the plan. It does not say why, or what to do about it.
That is the manager's job.
Each variance is a question to ask. Lena, Aisha and Priti go down the table line by line.
| Variance | Why it happened | What Lena decides |
|---|---|---|
| Sales revenue $3,000 [A] | A wet month: fewer people walked past the shop | Nothing is broken in the shop; plan lower for next March, or try a rainy-day offer |
| Bread and cakes $1,200 [F] | Fewer sales, so less bread was sent from Mill Lane | Not a saving to praise: it simply follows the lower sales |
| Wages $600 [A] | Overtime to cover a counter assistant who was off sick | Accept it once; if it happens again, keep a part-timer on call |
| Advertising $200 [F] | An advert in the local paper was dropped | Check whether dropping it added to the fall in sales before cutting it again |
Before: planning
- Decide what each centre may spend, and so what the business can afford
- Plan Mill Lane's baking around what the shops expect to sell
- Test a new idea, such as the Station Road shop, on paper first
During: control
- Spot an overspend early, while there is still time to act
- Know whom to ask: the manager of the centre with the variance
- Give each manager a target to aim for
After: learning
- Find out why the plan and the real figures differed
- Set next year's budget on better figures
- Judge each manager against a fair target
Where budgets go wrong: A budget is only as good as its estimates. Set the target too high and managers give up on it; too low and it is easy to beat.
Some managers spend whatever is left before the year ends, so that next year's budget is not cut. And a plan fixed months ahead can stop a manager acting on a chance nobody foresaw.
Practice with real exam questions
Answer exam-style questions and get AI feedback that shows you exactly what examiners want to see in a full-marks response.
How this comes up: Mostly as a table of budgeted and actual figures. Short calculations come first, for one or two marks each: a variance with its letter, a missing budgeted or actual figure, a total, or a monthly variance built from a daily one.
For four marks you may construct the whole budget with its variance column. Written parts ask you to distinguish a cost centre from a profit centre, explain an advantage or drawback of profit centres, or explain what the variances mean for the business.
Constructing a budget
- Head it: the business, 'budget for the period ending …', and the units ($).
- Three columns: budgeted figures, actual figures, variance.
- Revenue lines first, then total revenue; then each cost, then total costs.
- The bottom line: excess of revenue over (under) costs, in all three columns.
- A letter on every variance, [A] or [F]; a variance of 0 needs none.
Three traps: Copying the table. The figures redrawn with no variance column are only the start.
No letters. Every variance needs [A] or [F]; without them the budget does not say what happened.
The wrong bottom line. Call it excess of revenue over (under) costs, not net profit, and work it out in every column.
Using the information in the table, construct a budget for Sunrise Surf School for July 2026.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.